What’s the Difference Between Home Improvement Loans, Home Equity Loans, and Home Equity Lines of Credit

Keeping up with home improvement projects can feel overwhelming for many homeowners. Every year, the list of updates tends to get longer, and funding these projects can put some strain on your bank account. 

There are plenty of options available to homeowners who do not want to pay for home-related projects out of pocket. If you have enough equity in a property, you might opt for a home improvement loan or a home equity line of credit. When looking at a home improvement loan vs. a home equity line of credit, the main difference is the type of loan terms and arrangement. Loans are designed to offer a lump sum payment up front, while lines of credit allow the owner to withdraw smaller sums of money as improvement projects evolve.

What is a Home Equity Line of Credit?

Often abbreviated as HELOC, a home equity line of credit allows you to borrow money against the equity of a home up to a percentage of the total value. This percentage will vary depending on the lender, but typically falls between 80-85% and may depend on your credit history or other factors. However, instead of receiving all the funding at once, you would have access to an open credit line. This allows you to withdraw money over a period of time and repay the balance according to the terms of the agreement. The specific repayment terms will depend on your lender.

To demonstrate this, let’s say a lender is offering a HELOC at 80% of your home’s total value. The lendable equity is calculated by finding 80% of your homes total value and subtracting your first mortgage. So, if your home’s value is $250,000, 80% equity would be $200,000. After subtracting your first mortgage of $150,000, you are left with $50,000 of lendable equity.

What is a Home Improvement Loan?

Home improvement loans are a little more straightforward, as proceeds must be strictly used for home improvements. Home Improvement Loans can be utilized in a variety of ways, including flooring, cabinets, outdoor lighting and landscape, and much more.

What is a Home Equity Loan?

A Home Equity Loan refers to a loan based off the equity an owner has in a property. After assessing the value of the loan, the borrower has the option to borrow up to a percentage of the total value (again, this will vary depending on the lender), minus any 1st lien mortgage. The exact percentage you may borrow depends on your credit history and other factors.

HELOC vs. Home Improvement Loan

Lending institutions can decide their own terms when it comes to HELOCs and home improvement loans. Still, there are some standard trends consumers have come to expect when comparing HELOC to home improvement loans:

Interest Rates:

Like most lines of credit, the interest rate on the HELOC can be adjustable. This is great when market rates are low, but can increase unexpectedly when the market changes. In contrast, home improvement loans tend to have fixed Annual Percentage Rates (APRs).


HELOCs can be used until they reach their maturity date, which will vary depending on the lender. Home improvement loans have a predetermined end date. Getting another loan requires applying again after successfully paying off the first one.

Which One Is Right for You?

Between all these options, no product is objectively better than the other. It all comes down to your personal finances and what best suits your situation. If your family operates on a strict budget and you need to know your exact payment every month, then an improvement loan or Home Equity Loan may make more sense for you.

Some finance gurus may discourage homeowners from taking out HELOCs and home improvement loans, unless they plan to use it to add value to their existing home. However, there are other excellent reasons to consider HELOCs. Some people use the funds to start a business, fund a college degree, or pay of medical bills. In contrast, lenders typically require home improvement loans to be used specifically for home renovations and improvements. Be sure to confirm usage restrictions with your lender.  

Upgrade Your Home Today

Taking out any loan is a serious decision. While it comes with many benefits, it’s only natural that you should have questions before you make a move that involves your home. With multiple options available, you may need some advice and insight to figure out which loan meets your specific needs. Taking the time to do your research and conducting a thorough financial evaluation with a trusted lender is the best way to ensure you make a solid decision.

Our team at Blackhawk Bank is ready to answer your questions and ask the thought providing questions that will help you make a sound decision. Give us a call at 608.364.8911. 


Mathew Reynolds

Senior Vice President of Consumer Banking & Investment Group

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