The cheapest way to finance a home improvement is usually cash you have saved for it. When you need to borrow, a loan secured by your home (a home equity loan or HELOC) normally carries a much lower rate than a personal loan or credit card, but it puts the house on the line and costs more in total if you stretch the term. Match the loan to the project size, how fast you can repay, and whether you can tolerate a variable rate.
Key takeaways
- As of October 2026, credit cards average 22.36% for accounts charged interest and 24-month bank personal loans average 11.90% (Federal Reserve, August 2026). Home-secured credit is usually priced off the 7.00% prime rate.
- For a $40,000 kitchen, a 5-year personal loan in our example costs $13,265.48 in interest; a 15-year home equity loan has a far smaller payment but costs $30,900.52.
- A cash-out refinance can be the most expensive option if it replaces a low-rate first mortgage.
- Home equity interest is tax-deductible only if the loan is secured by the home and used to buy, build or substantially improve it, and only if you itemize.
Your financing options, side by side
The table compares the main ways households pay for renovations. Where a federal benchmark exists, the rate column uses it. There is no official national average for home equity loans or HELOCs, so those rows describe how the rate is built rather than quoting a number. Your own rate depends on credit, equity and the lender.
| Option | Rate benchmark (as of Oct 2026) | Typical term | Collateral | Speed | Main fees |
|---|---|---|---|---|---|
| Cash savings | None; you give up the interest your savings would earn | None | None | Immediate | None |
| HELOC | Variable: an index such as prime (7.00%) plus a lender margin | Draw period, then repayment period | Your home | Weeks; often needs an appraisal | Appraisal, application, closing; some charge annual or inactivity fees |
| Home equity loan | Fixed; no federal average published | Fixed term, often 5 to 30 years | Your home | Weeks | Appraisal and closing costs |
| Cash-out refinance | 30-year fixed average 7.40% (PMMS); cash-out loans may price higher | New first mortgage, often 15 or 30 years | Your home | Weeks to a couple of months | Full mortgage closing costs |
| Personal loan | 11.90% (24-month bank loan average, Aug 2026) | Commonly 2 to 7 years | Usually none | Days | Possible origination fee |
| FHA 203(k) | FHA mortgage rate; no federal average | Mortgage term | Your home | Slowest; requires contractor bids and inspections | Mortgage closing costs, FHA insurance, consultant fees on standard 203(k) |
| FHA Title I-insured loan | Set by the lender | Up to 20 years and 32 days | Mortgage required above $7,500 (single-family) | Varies by lender | Lender fees |
| Fannie Mae HomeStyle Renovation | Conventional mortgage rate | Mortgage term | Your home | Slow; plans and draws required | Mortgage closing costs |
| Credit card / promotional financing | 22.36% average for accounts charged interest (Aug 2026); 0% offers are temporary | Open-ended | None | Immediate | Deferred interest if a promo balance is not paid in full |
Loans secured by your home
A HELOC works like a credit line. The CFPB notes that most HELOC rates combine an index such as the prime rate with a margin, so your payment can change even if you borrow nothing new. Many plans allow interest-only payments during the draw period, then require principal, which can raise the payment sharply. The lender can also freeze or cut the line if your home’s value falls. Our explainer on what a HELOC is and how to apply covers the application steps.
A home equity loan gives you a lump sum at a fixed rate and a fixed payment, which suits a project with a known price. A cash-out refinance replaces your whole first mortgage with a bigger one. That can make sense if your current rate is at or above today’s market, but it is costly if you would give up a low rate, as the example below shows. See when to refinance your mortgage for the break-even test.
Renovation mortgages and FHA Title I-insured loans
Renovation mortgages lend against what the home will be worth after the work, which helps when you have little equity today. FHA’s 203(k) program can be used to buy or refinance a home together with repairs. Under HUD Mortgagee Letter 2024-13, the Limited 203(k) allows up to $75,000 in rehabilitation costs for case numbers assigned on or after November 4, 2024, with up to nine months to finish; the Standard 203(k) handles larger, structural projects with up to 12 months and a required HUD consultant.
Fannie Mae’s HomeStyle Renovation loan is the conventional counterpart. As of October 2026, renovation costs are capped at 75% of the lesser of purchase price plus renovation costs or the as-completed appraised value on a purchase, and 75% of the as-completed value on a refinance. FHA’s property improvement loan program, known as Title I, insures smaller loans: up to $25,000 for a single-family home with a term of up to 20 years and 32 days under federal regulations, and HUD’s parameters allow loans up to $7,500 without a mortgage on the home. These loans are made by HUD-approved lenders and availability varies, so ask lenders in your area whether they offer one.
Personal loans, cards and 0% promotions
Unsecured options are fast and do not risk your home, but they cost more. A 0% introductory card or store financing can be the cheapest money of all if you pay the full balance before the promotion ends. Read the terms closely: with a deferred-interest promotion, the CFPB explains that missing the payoff deadline means paying interest back to the original purchase date.
Worked example: a $40,000 kitchen, three ways
Suppose you borrow the full $40,000. We compared a 5-year personal loan at 11.90% (the Federal Reserve’s August 2026 average for 24-month bank personal loans, used here as a proxy because it publishes no 5-year series), a 15-year fixed home equity loan at an assumed 8.50% (prime plus 1.5 points, for illustration), and a HELOC at an assumed 8.00% (prime plus 1 point) repaid over 10 years. A credit card at the 22.36% average is shown only for reference. Fees are left out.
| Option | Rate | Term | Monthly payment | Total interest |
|---|---|---|---|---|
| Personal loan | 11.90% | 5 years | $887.76 | $13,265.48 |
| Home equity loan | 8.50% (assumed) | 15 years | $393.90 | $30,900.52 |
| HELOC, rate unchanged | 8.00% (assumed) | 10 years | $485.31 | $18,237.38 |
| Credit card (reference) | 22.36% | 5 years | $1,112.96 | $26,777.49 |
The lowest payment does not mean the lowest cost. The home equity loan’s payment is less than half the personal loan’s, but stretching the debt to 15 years more than doubles the interest. The personal loan costs the least in total because it is paid off fastest. If you take the home equity loan and pay it like a 5-year loan, you get the lower rate and the short payoff.
The HELOC carries rate risk. If its rate rose by 2 points after two years, the payment would climb from $485.31 to $520.93 and total interest would reach $21,656.26, or $3,418.88 more than the flat-rate case. And if you only paid interest during the draw period, the payment would be $266.67 a month while the balance stayed at $40,000.
Why a cash-out refinance can backfire
Now say you owe $250,000 at 3.50% with 25 years left, paying $1,251.56 a month. A cash-out refinance to $290,000 at the 7.40% PMMS average for the week of October 15, 2026 raises the payment to $2,007.90, an increase of $756.34. Keeping the old mortgage and adding the 15-year home equity loan instead costs $1,645.46 a month in total. Over the life of the loans, the refinance adds $276,477.94 in interest compared with keeping the low-rate mortgage, partly because it also restarts a 30-year clock. Closing costs would widen the gap.
The tax angle
IRS Publication 936 says interest on home equity debt is deductible only if the money is used to buy, build or substantially improve the home that secures the loan. A substantial improvement adds value, extends the home’s life or adapts it to a new use; routine repairs such as repainting do not qualify on their own. The deduction falls under the overall limit of $750,000 of home acquisition debt ($375,000 if married filing separately) for loans taken out after December 15, 2017.
You only benefit if you itemize. With a 2026 standard deduction of $32,200 for married couples filing jointly and $16,100 for single filers, many households will not itemize, so treat any tax savings as a bonus rather than part of the plan. Personal loan and credit card interest is not deductible for personal projects.
Which projects are worth financing
Be skeptical of claims that a remodel will “pay for itself.” Resale value depends on your local market, the quality of the work and what buyers in your price range expect, and most projects return less than they cost. Borrowing is easiest to justify for work that protects the home or is needed anyway: a failing roof, a broken heating system, water damage or safety repairs. Upgrades you want for your own enjoyment are fine too, but plan to pay for them as an expense, not an investment. Our guide on budgeting for home maintenance helps you set aside cash so routine replacements do not need a loan.
When borrowing for a renovation is a bad idea
- Your income is uncertain. Missing payments on a home-secured loan can lead to foreclosure. The CFPB’s HELOC booklet warns that you could lose your home if you cannot repay.
- You may sell soon. A HELOC or home equity loan must generally be repaid at sale, and the upgrade may not raise the price by what it cost.
- You would carry high-rate debt for a want. Financing a cosmetic remodel on a credit card at more than 20% can cost more than half the project’s price in interest.
- You would give up a low first-mortgage rate. As the example shows, a cash-out refinance can be the most expensive path.
- You have no emergency fund. Draining savings for a project and borrowing for the next emergency leaves you worse off.
Frequently asked questions
Is a HELOC or a home equity loan better for a remodel?
A home equity loan fits a project with a fixed price because the rate and payment are fixed. A HELOC fits work done in stages or with uncertain costs, since you draw only what you need, but its rate can rise. Compare offers on APR, fees and term.
Can I deduct the interest on a personal loan used for home improvements?
Generally no. IRS Publication 936 allows the deduction only on debt secured by the home and used to buy, build or substantially improve it. An unsecured personal loan does not qualify.
How much can I borrow with an FHA 203(k) loan?
The total loan follows FHA’s limits for your county. Within that, the Limited 203(k) caps repair costs at $75,000 under HUD Mortgagee Letter 2024-13; larger or structural work goes through the Standard 203(k), which requires a HUD consultant.
Can I cancel a HELOC after signing?
For a HELOC on your home, the CFPB says you can cancel in writing within three days of opening the account and get your fees back. Ask the lender for the cancellation notice at closing so you know the exact deadline.
Is 0% store financing a good way to pay for a project?
Only if you divide the balance by the number of promo months and pay at least that much every month. With deferred interest, missing the deadline triggers interest back to the purchase date, which can be costly.
Sources
- G.19 Consumer Credit (released Oct 7, 2026), Federal Reserve, accessed Oct 2026
- H.15 Selected Interest Rates, Federal Reserve, accessed Oct 2026
- Primary Mortgage Market Survey, Freddie Mac, accessed Oct 2026
- What You Should Know About Home Equity Lines of Credit, CFPB, accessed Oct 2026
- What is a deferred interest promotion?, CFPB, accessed Oct 2026
- Mortgagee Letter 2024-13: 203(k) Rehabilitation Mortgage Insurance Program, HUD, accessed Oct 2026
- 24 CFR 201.10 Loan amounts (Title I), eCFR, accessed Oct 2026
- 24 CFR 201.11 Loan maturities (Title I), eCFR, accessed Oct 2026
- Property Improvement Loans: Allowable Loan Parameters (Title I), HUD, accessed Oct 2026
- B5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower Eligibility, Fannie Mae Selling Guide, accessed Oct 2026
- Publication 936, Home Mortgage Interest Deduction, IRS, accessed Oct 2026
- IRS releases tax inflation adjustments for tax year 2026, IRS, accessed Oct 2026
This article is general education, not individualized financial, tax or legal advice.
