Refinancing For Home Improvements: A Guide

The Joint Center for Housing Studies at Harvard releases a quarterly report called the Leading Indicator of Remodeling Activity, which shows how much Americans will spend on renovations in the near term. Through the third quarter of 2025, spending is projected to increase 1.2% to $477 billion. That’s a lot of project funding. While a cash-out refinance or home equity loan can be a simpler route, home renovation refinance loans are also an option.

Understanding Home Renovation Loans

Home renovation loans are for financing home upgrades and repairs. The primary difference between these and a cash-out refinance or home equity loan is that they build in the cost of home renovations while charging you as if it’s a rate-and-term refinance.

This could give you a slight break on the rate because there can be higher costs associated with a cash-out refi based on the higher risk from a bigger loan amount. Because renovations aren’t complete when the loan is funded, the appraisal process can be more involved.

Using A Cash-Out Refinance For Home Improvements

In a cash-out refinance, you refinance your mortgage based on a bigger balance and get the difference in cash. The higher your equity prior to refinancing (the lower your balance compared to the home value), the more money you can convert to cash. Keep in mind, lenders generally require you to leave at least 20% equity in the home to mitigate risk.

How To Calculate Your Home Equity

Calculating your home equity involves subtracting your remaining mortgage balance from your home value.

Let’s walk through an example:

You bought your home for $300,000. It’s been several years, and your best guess at the current home value is $350,000. At the same time, you’ve paid the balance down to $250,000.

$350,000 (home value) - $250,000 (mortgage balance) = $100,000 (home equity)

Our refinance calculator could help you play out your own scenarios.

What Can You Use That Cash For?

Because your cash-out refinance loan isn’t tied to any specific plans for home improvements, it can be used for whatever you want. Sure, you could redo your kitchen, but you might also put the funds toward debt consolidation, tuition or a car. But if used for renovations, the interest is usually tax-deductible.

Steps To Refinance Your Mortgage For Home Improvements

• Step 1: Determine your goals. This will help you ballpark how much money you need.
• Step 2: Identify your home’s value. For now, a reasonable estimate is fine.
• Step 3: Determine your loan options. Based on your goals and estimated home value, the lender will help you determine the best scenario.
• Step 4: Apply. Documentation regarding your income and assets will be collected. Your lender will pull your credit to get a look at your qualifying credit score and existing debts as well.
• Step 5: Get a formal home value. An appraiser will compare your home with similar properties that have recently sold in the area. A basic health and safety inspection is also performed. In some circumstances, an alternative to an appraisal will be used.
• Step 6: Close on the loan. This is where closing costs are paid and paperwork is signed.
• Step 7: Use the loan proceeds for renovations. You receive the funds 3 business days after the loan closes. It comes in a lump sum, so you should be able to begin your project immediately.
• Step 8: Repay the loan. If you’re able, you can save interest and years on the term by making periodic additional payments directly toward the balance. 

Qualifying For A Cash-Out Refinance

To do a cash-out refinance, you and your home must first meet certain requirements.

Credit Score

In most cases, you’ll need a credit score of at least 620 to do a cash-out refinance. The exact credit score you’ll need depends on factors like your loan type, the purpose, how many units the property has and how much equity you’ll be leaving in the home.

Equity

If you take cash out with a conventional loan or FHA loan, you’ll need 20% equity in your home. VA loans, on the other hand, are unique in that you can refinance 100% of the home’s value. You don’t have to leave any equity in the home if you meet your lender’s qualification requirements.

Debt-To-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is also considered when you refinance. DTI is calculated by combining all your recurring minimum monthly debt and dividing it by your gross monthly income – income before taxes. The maximum DTI allowed varies by loan type and lender, but you’ll typically need a DTI of 43% or lower to qualify for the most options.

Keeping up with these requirements and following helpful refinance tips can result in a stress-free refinancing experience.

Benefits Of A Cash-Out Refinance

In addition to the amount of cash you can gain, getting a cash-out refinance can come with other benefits, too.

• Low-cost home improvements: A cash-out refinance can be a cost-effective way to make home improvements when you don’t have the money on hand. This enables you to borrow a large sum, putting expensive renovations in reach.
• You could secure a better loan: The best time to refinance is when it lines up with your goals and financial situation. While everyone wants the lowest rate possible, the reality is that no matter the mortgage rate you can get, it’s likely going to be lower than what you would see if you opted for a personal loan or credit card.
• Boost your property value: Improvements can add value to your home. You’ll come out ahead if your house is worth more. The right home improvements could make your home more appealing to potential buyers.
• Maintain one payment: A cash-out refinance isn’t the only way to get funds for home renovations, but it may be easiest on your budget. Home equity loans, personal loans and credit card debt add extra payments and more interest. By choosing a cash-out refinance vs. a home equity loan or other loan type, you’ll maintain a single mortgage payment that may not be much higher than the one you have now.
• Low interest rates: Some people turn to credit cards or personal loans to bankroll home improvements, but those options come with higher interest rates, sometimes in the double-digit range. When you refinance your mortgage, you can borrow money at a much lower interest rate. In today’s market, that’s typically around 7%.
• You may get a tax deduction: Mortgage interest is usually tax-deductible to the extent that is used to build, buy or improve a home. There are limits and you should consult a tax professional, but this benefit doesn’t apply to many other types of loans.

Drawbacks Of Doing A Cash-Out Refinance

Apart from the benefits listed above, there are downsides you should consider before doing a cash-out refinance.

• The amount you can borrow depends on your equity: Lenders typically require you to maintain 20% equity in your home after a cash-out refinance, limiting the amount you can access for home improvements. If you had huge renovation aspirations, or if your appraisal comes back lower than you thought it would, you could be forced to find additional funding sources.
• You’ll get different loan terms: Like any refinance, a cash-out refinance changes the terms of your loan. You’ll get a new loan with an updated interest rate, and your payment will change to reflect the change in your loan. This could mean a larger payment, but not always. For example, if you’re resetting your term to 30 years, or if you’re getting a lower interest rate, your payment won’t necessarily go up.
• Refinancing requires closing costs: A new mortgage also means new closing costs. The closing costs may be subtracted from the cash you’re getting, so you might not pay anything out of pocket. However, it’s a good idea to weigh closing costs against interest rate savings and the potential increase in value to determine if a cash-out refinance makes sense for you. If you plan to move soon or take out only a small amount of money, a cash-out refinance may not be the best option.

Types of Home Renovation Loans

Home renovation loans are based on the home value after your repairs or upgrades are done. These often require a complete project plan that can be evaluated to determine the value, although this can vary based on the cost of the renovations and whether the remodeling involves structural work. While a cash-out refinance isn’t itself a home renovation loan, it may be an easier way to accomplish your goals.

FHA 203(k) Loans

An FHA 203(k) loan allows you to build in the cost of remodeling while doing a rate-and-term refinance, which may lead to more favorable loan terms. The FHA option specifically may be best for clients who are building or may have a few past dings on their credit. You may also be approved with a higher DTI than some other loan options. The minimum down payment is 3.5% if you have a 580 credit score.

There’s a standard 203(k) loan and a limited one for nonstructural work up to $75,000.

VA Renovation Loans

VA renovation loans are available to eligible active-duty service members, reservists, National Guard personnel, veterans and qualified surviving spouses. The primary benefit of going with a VA loan is the lack of an equity requirement.

USDA Renovation Loan

USDA renovation loans are for remodeling properties in eligible rural areas. If you live in such an area and make no more than 115% of the median income where you’re located, you may be able to do renovations without a minimum equity requirement. As with FHA 203(k) loans, these include both a standard loan option requiring an approved project plan as well as one used for nonstructural repairs up to $35,000.

Fannie Mae HomeStyle^® Renovation Loans

Fannie Mae offers a HomeStyle^® loan that allows you to build the cost of your home improvements into a rate-and-term refi. The advantage of this over the government loan options touched on so far is that there may be additional flexibility in the types of renovations you can do. This can also be combined with an energy-efficiency offering and the HomeReady^® loan for lower-income borrowers.

Freddie Mac CHOICERenovation^® Loans

Freddie Mac’s answer for renovation loans is CHOICERenovation^®. Similar to some of the other options we’ve discussed, this comes in both an option for bigger renovations and one for smaller scale remodels exceeding no more than 10% — 15% of the property value after completion, depending on where you live. This can also be combined with some of Freddie Mac’s other loan options like Home Possible^®.

Cash-Out Refinances

A cash-out refinance is not a traditional home renovation loan, but allows you to use your home equity to pay for home improvements.

Because a cash-out refinance is based on the current value of the home, the process is more straightforward than with a home renovation loan. You don’t need a project plan. There aren’t additional inspections that could hold up the release of funds. Once you have your loan proceeds, you’re able to move forward immediately with the full scope of your project.

Alternatives To Refinancing For A Home Improvement Loan

Not everyone has the equity to qualify for a cash-out refinance. If you need another way to make home improvements, here are a few options:

• Home equity loan: A home equity loan is a different way to borrow against the equity in your home. It’s a second mortgage based on your home’s equity. While a cash-out refinance replaces your current mortgage, a home equity loan comes with its own interest rate and monthly payments, keeping your current mortgage in place. This makes sense if the combined rate is lower than what you could get with a cash-out refi.
• HELOC: A home equity line of credit (HELOC) turns the equity in your home into a credit line. HELOCs draw on the equity instead of a one-time payment and are great options for long-term renovation projects. Make sure you understand the difference between a cash-out refinance vs. a HELOC before deciding which is better for your financial situation. HELOCs offer flexibility but come with variable rates. Rocket Mortgage doesn’t offer HELOCs, though we do offer Home Equity Loans.¹
• Personal loans: Personal loans are another option. These are unsecured loans issued and supported only by the borrower's creditworthiness, rather than by collateral. As a result, they tend to have higher interest rates. Rocket Loans℠ offers personal loans for home improvement and many other uses.

The Bottom Line On Refinancing For Home Renovations

A cash-out refinance could be cost-effective if you’re looking to turn your home improvement list into a finished project or two. To explore this or a Home Equity Loan, apply online today with Rocket Mortgage.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.