Refinancing vs. HELOC: Which Is Better for Home Renovations?
Thinking about upgrading your kitchen, finishing the basement, or replacing that old roof? Home renovations aren’t just exciting they’re also expensive. Two of the most common ways homeowners finance major upgrades are mortgage refinancing and home equity lines of credit (HELOCs).
But which one makes more sense in 2025?
Both options tap into your home’s equity, but they serve different purposes depending on your financial goals, current mortgage, and renovation plans. This guide breaks down the key differences, risks, rates, and real-life scenarios so you can make the right decision for your home and your wallet.
What’s the Difference Between Refinancing and a HELOC?
At a glance:
| Feature | Mortgage Refinance | HELOC |
|---|---|---|
| Purpose | Replace your existing mortgage | Add a revolving line of credit using equity |
| Access to Funds | Lump sum | Draw as needed (like a credit card) |
| Interest Rates | Typically lower, fixed or adjustable | Typically variable, may start lower |
| Monthly Payment Impact | Replaces current payment | Adds an additional monthly payment |
| Closing Costs | Yes — usually 2–5% of loan | Lower, often minimal upfront fees |
| Best For | Large, one-time renovation projects | Flexible, ongoing or smaller projects |
When Refinancing Makes Sense for Renovations
Refinancing is a smart move if you’re already considering replacing your mortgage and want to roll renovation costs into the new loan. It’s especially effective when:
- Interest rates are lower than your current mortgage
- You plan to stay in the home for many years
- You have at least 20% equity
- You’re doing a large, one-time renovation (like an addition)
Example:
David refinanced his $300,000 mortgage at 7.2% into a new 30-year loan at 5.8%, pulling an extra $50,000 in cash to remodel his kitchen and bathrooms. His monthly payment increased slightly due to the higher loan amount, but he locked in a lower rate and only pays one mortgage.
Pros of Refinancing for Renovations:
- Lower long-term interest cost
- Fixed payments offer predictability
- Can consolidate other debt if needed
Cons:
- Higher closing costs
- Longer approval process
- Starts a new loan term (you might reset the 30 years)
When a HELOC Is the Better Choice
HELOCs work more like a credit card secured by your home’s equity. You only borrow what you need, when you need it which is ideal for ongoing, phased, or smaller renovations.
It’s especially useful when:
- You don’t want to touch your existing mortgage
- You have strong equity and solid credit
- Interest rates are high and you don’t want to refinance the whole loan
Example:
Maria in Arizona opened a $60,000 HELOC to tackle backyard landscaping, HVAC replacement, and roof repairs over the next 18 months. She drew $10,000 at a time as each project began, keeping interest costs low.
Pros of HELOCs for Renovations:
- Only borrow what you use
- Flexible repayment and access to funds
- Lower upfront costs and faster approval
Cons:
- Variable interest rates can rise over time
- Adds a second monthly payment
- Your home is still collateral
Rate Trends in 2025: What to Expect
- Mortgage refinance rates in 2025 are averaging around 5.9–6.6%, depending on credit and loan type.
- HELOC rates tend to start lower (around 5.5% for prime borrowers) but are typically variable, meaning they can increase over time.
If you expect to pay off the debt quickly, a HELOC might cost you less in interest. If you prefer predictability and are financing a large sum over many years, refinancing may be more stable.
Key Eligibility Factors
Before choosing either route, consider the following:
| Factor | Refinancing | HELOC |
|---|---|---|
| Credit Score | 620+ (720+ for best rates) | 660+ recommended |
| Home Equity | 20%+ often required | 15–20%+ recommended |
| DTI Ratio | Ideally below 43% | Ideally below 50% |
| Employment History | 2+ years of steady income | Same as refinance |
| Loan Purpose | Often scrutinized for cash-out | Flexible, but documentation may apply |
Which Option Should You Choose?
Here’s how to decide:
Choose Refinancing if:
- You want one monthly payment
- You can get a lower rate than your current mortgage
- You need a large sum upfront
- You plan to stay in the home for 5+ years
Choose HELOC if:
- You want flexibility and control over how much you borrow
- You’re mid-way through a mortgage with a good rate
- Your renovations are spread over time
- You want lower upfront fees
Final Thought: Choose the Tool That Matches the Job
There’s no one-size-fits-all answer when it comes to funding home renovations. Whether you refinance or open a HELOC depends on your project size, current mortgage rate, equity position, and how long you plan to stay in your home.
Both options let you unlock your home’s equity — just in different ways. Take time to run the numbers, and don’t be afraid to get quotes for both before deciding.
Up next: Before you start knocking down walls or adding square footage, make sure you understand how it can impact your insurance bill.
Read next: Home Renovation Projects That Can Increase Insurance Premiums
