Paying for a Renovation, Addition or New Build With Home Equity

How much equity can you borrow against?

Lenders usually set the limit as a percentage of your home’s appraised value, minus what you still owe. PenFed allows up to 85% outside Texas, depending on credit, and Bank of America says you can generally borrow up to 85%. In Texas, the loan amount or credit limit plus all other debt on a homestead cannot exceed 80% of its market value on the day the credit is extended.

For a $520,000 house with a $310,000 mortgage, 85% gives $520,000 × 0.85 - $310,000 = $132,000. In Texas the same house tops out at $106,000. Leave room above the contractor’s bid: with a home equity loan, more money later means a new application.

To run your own numbers, including the payment after the draw period ends, try this home equity line of credit calculator. Home Equity Calcs is a free calculator site from the team behind PTO-AI, a construction-document checking tool.

HELOC vs. home equity loan on an $80,000 project paid in stages

An $80,000 addition is billed $20,000 per stage (foundation, framing, rough-in, finishes) at the start of months 1, 3, 5 and 7. Both options use 8.00%: the 7.00% prime rate on October 2, 2026, plus an example 1-point margin; lenders set their own. The HELOC is interest-only while you draw. The 15-year fixed home equity loan is funded at closing.

In the first 12 months, the HELOC charges $4,800 in interest. The loan charges $6,296 in interest and repays $2,878 of principal, $9,174 in total. The HELOC saves about $1,496 in interest because most of the money is borrowed only when a stage is billed. Interest the idle loan money could earn in savings would narrow that gap. After a year of interest-only payments, though, none of the $80,000 is repaid.

How much does the payment rise after the draw period?

PenFed and Bank of America both use a 10-year draw period followed by 20 years of repayment. At PenFed, minimum payments during the draw period leave the balance unchanged; Bank of America’s minimum already repays principal. The CFPB says payments are often significantly higher once repayment starts. Under some plans, everything still owed falls due in one large balloon payment.

Pay only interest for 10 years and the full $80,000 is still owed. Over 20 years at 8.00%, the payment rises from $533.33 to $669.15 a month. If prime rose 2 points, the same balance would cost $666.67 interest-only and $772.02 in repayment. Paying principal after the last stage reduces the jump.

How do the options compare for a building project?

When does an FHA 203(k) or Fannie Mae HomeStyle loan fit?

HUD’s Limited 203(k) lets homeowners finance up to $75,000 into their mortgage for minor, non-structural work, with no minimum. The Standard 203(k) covers major rehabilitation and structural additions, with repairs of at least $5,000. Our $80,000 addition would need the Standard version. After each phase, a 203(k) consultant inspects the work and the lender pays with a two-party check to the borrower and the contractor.

Fannie Mae’s HomeStyle Renovation loan adds the cost of repairs, remodeling or energy improvements to a purchase or refinance loan. There is no minimum renovation amount. Where zoning allows, it can fund accessory dwelling units, garages and pools. On a refinance, renovation costs are capped at 75% of the “as completed” appraised value, and the work must finish within 15 months of closing. The money sits in escrow: up to 50% can be released at closing, and later draws require an inspection.

For a current owner, both programs mean a new first mortgage, sized against the home’s appraised value once the work is done. A HELOC limit is set from today’s value, so with little equity now, a renovation mortgage may reach further. If your existing rate is low, a HELOC keeps it in place.

Cash-out refinance, home equity investments and reverse mortgages

Cash-out refinance. A larger mortgage replaces yours and pays you the difference. The CFPB flags higher closing costs and a new rate that may exceed your current one.

Home equity investment. A company pays you cash now for one repayment later, based partly on your home’s value. The CFPB, which calls these home equity contracts, lists home improvements among their main uses. In the first years of many contracts, what you owe climbs 19.5% to 22% a year, the CFPB found. Owners who cannot pay at the end may have to sell or face foreclosure.

Reverse mortgage. You must be at least 62 to get a Home Equity Conversion Mortgage (HECM). There is no monthly mortgage payment. Interest and fees are added to a growing balance, repaid when you no longer live in the home. You still pay property taxes and homeowners insurance and must keep the house in good condition. The CFPB warns that a contractor who suggests a reverse mortgage to pay for repairs may be running a scam.

Is the interest tax-deductible?

Interest on a home equity loan or HELOC is deductible only if you itemize and the money buys, builds or substantially improves the home that secures the loan. IRS Publication 936 calls an improvement substantial if it adds value, prolongs the home’s useful life or adapts it to new uses. Repainting on its own is a repair. The limit is $750,000 of qualifying mortgage debt taken out after December 15, 2017 ($375,000 if married filing separately), and Public Law 119-21 removed the 2026 end date for these rules. Keep invoices and draw records for each stage.

Can home equity pay for a new build or a rebuild?

A HELOC, home equity loan or cash-out refinance on your current home can fund a house you build elsewhere, but interest on the money used for the new house fails the IRS test, because the new house does not secure the loan. A home under construction can count as a qualified home for up to 24 months if it becomes your qualified home when it is ready for occupancy.

The renovation mortgages cover new construction only in narrow cases. HomeStyle cannot fund a complete tear-down and rebuild, though it can pay for non-structural finishing work on a new home that is at least 90% complete. The Standard 203(k) can rebuild a demolished house only if the whole existing foundation stays in use and a licensed structural engineer confirms it can carry the new structure. The Limited 203(k) cannot be used for reconstruction. A ground-up build on an empty lot fits neither program.

Which risks matter most on a construction project?

• The house is the collateral. Falling behind on a loan secured by your home can cost you the house.
• A line can be frozen mid-project. Federal rules let a HELOC lender stop draws or cut the limit if your home’s value falls significantly below its appraisal, or if a material change in your finances makes repayment doubtful. A freeze between stages leaves a contractor bill unfunded; money a lump-sum loan already paid out is not affected.
• Fees. Lenders can charge application, appraisal, title and annual fees, and some charge for closing the line early, usually within two or three years. Bank of America charges $450 if you close within 36 months, except on lines under $25,000, on Texas homesteads and in Maryland.
• Minimum draws. Some plans set a minimum per draw or require a draw at opening, and Texas homestead advances must be at least $4,000. Figure’s lines are 100% drawn at origination, so interest runs on the full amount.
• Timing. On a line secured by your main home, you can cancel until midnight of the third business day after opening or receiving the required disclosures, whichever is later, and no money is released before then except into escrow. Texas homestead loans and lines cannot close before the 12th day after you apply or receive the required notice, whichever is later.

How to decide: a checklist

1. Get the contractor’s payment schedule in writing. Staged payments favor a HELOC; a big upfront payment favors a lump sum.
2. Add a contingency to the bid and check the total against your lender’s cap. If today’s equity is not enough, ask about 203(k) or HomeStyle, which lend against the finished value.
3. Compare your mortgage rate with today’s offers. A HELOC or home equity loan keeps your first mortgage; a cash-out refinance, 203(k) or HomeStyle loan replaces it.
4. Price the payment after the draw period and at a rate 2 points higher.
5. Ask about minimum draws, annual and early-closure fees, and whether the line is fully drawn at closing.
6. If the work is structural or costs more than $75,000, or you want each draw inspected, also get a Standard 203(k) or HomeStyle quote.