Financing a Home Remodel: HELOC vs Loan vs Refi

The most common ways homeowners finance a remodel in the Twin Cities are a home equity loan, a home equity line of credit (HELOC), and a cash-out refinance, and the right one depends on how much you have borrowed against your home already and how long you plan to carry the balance. Each option pulls from the equity in your home, but they work very differently once the renovation starts.

At New Spaces, we are not lenders and we do not recommend a specific product for your situation. With more than 40 years of experience designing and building kitchen remodels, basement finishes and whole-home projects across the Twin Cities metro, what we can do is help you plan a project with a fixed price up front, so whichever financing route you choose, you are borrowing against a number that will not move once construction starts.

What Are the Main Ways to Finance a Home Remodel?

Most Twin Cities homeowners choose between three options: a home equity loan, a HELOC, or a cash-out refinance. A smaller group pays cash from savings, and some combine a personal loan with savings for a smaller project like a primary suite refresh rather than a whole-home remodel.

Home Equity Loan

A home equity loan is a second mortgage with a fixed interest rate and a fixed monthly payment, paid out as a single lump sum at closing. It works well when you know the total project cost before you start, which is exactly what a fixed-price proposal gives you.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home, typically with a variable rate and a draw period where you borrow only what you need as the project moves forward. It fits a phased remodel, where a kitchen happens this year and a main level or primary suite follows in a later phase.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger one and gives you the difference in cash. It tends to make sense when current mortgage rates are close to or better than your existing rate, since you are resetting the whole loan, not just borrowing on top of it.

Is a Home Equity Loan or a HELOC Better for a Remodel?

A home equity loan is generally the better fit when your project has one fixed-price contract and one clear start and finish, because the fixed rate and lump-sum payout match how a single-phase remodel is billed. A HELOC is generally the better fit when the project is happening in phases over a year or more, or when you want a credit line available for a future phase without paying interest on money you have not used yet.

How Does a Cash-Out Refinance Work for a Remodel?

A cash-out refinance rolls your project cost into a single new mortgage. Twin Cities homeowners who already have a higher rate than what is currently available sometimes use a remodel as the reason to refinance and lower their rate at the same time. The tradeoff is closing costs on the full new loan amount, not just the renovation portion, so it usually makes the most sense on larger whole-home projects rather than a single-room refresh.

Financing Option Comparison

Option	Rate type	How funds are paid out	Best fit
Home equity loan	Fixed	Lump sum at closing	Single-phase project with a fixed-price contract
HELOC	Variable (usually)	Draw as needed	Multi-phase remodels over a year or more
Cash-out refinance	Fixed or variable, resets whole mortgage	Lump sum at closing	Larger whole-home projects, especially if refinancing improves your existing rate

How Does a Fixed-Price Proposal Make Financing Easier?

Lenders want a number, and a remodel that is still being priced room by room as construction happens makes that number a moving target. New Spaces uses a Needs, Wants and Wishes discovery process up front, which produces three design options at three investment levels before a contract is signed. That gives you (and your lender) a firm total to borrow against, with a fixed-price commitment that will not change mid-project outside of a scope change you approve in writing.

Homeowners in the CFPB’s home equity guidance are encouraged to compare at least two lenders before committing to a home equity loan or HELOC, since rates and closing costs vary more between lenders than between loan types. We are glad to talk through project scope and timing with your loan officer once you have a lender in mind, but the loan decision itself sits with you and your bank or credit union.

How Do Twin Cities Homeowners Decide Between These Options?

In practice, most homeowners we work with in Edina, Minnetonka, Eden Prairie, and the rest of the Twin Cities metro make this decision based on two questions: is this one project or several phases, and does my current mortgage rate make a refinance worth resetting the whole loan for. A single kitchen or main level remodel with a firm price usually points to a home equity loan. A multi-year plan covering a primary suite this year and an addition later usually points to a HELOC. A large whole-home project on an older mortgage rate is when a cash-out refinance earns a serious look.

Ready to Get a Firm Number to Finance?

Start a conversation with New Spaces or call (952) 898-5300. We will walk through the Needs, Wants and Wishes process and give you three design options at clear investment levels, so you can take a real number to your lender instead of a guess.

Frequently Asked Questions