Planning · Renovation financing
Renovation financing: HELOC vs personal loan.
See the payment in the draw period and after, the personal loan payment and fee, and what a rate rise does to the HELOC.
Inputs
Payments and interest
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How this works
A HELOC (home equity line of credit) and a personal loan fund the same project in very different ways. This calculator models a typical HELOC structure: interest-only payments in a draw period (amount x rate / 12), then a fully amortising payment over the repayment period; and a fixed-rate personal loan with an optional fee. The amortising payment is P x r / (1 - (1 + r)^-n), with r the monthly rate and n the number of months. Your lender's actual terms, rate type and fees govern.
The stress test re-prices the HELOC repayment at a higher rate. Many HELOCs have variable rates, so the payment can rise; a HELOC is also secured by your home, while a personal loan usually is not. The totals use different lengths, so a lower payment can still cost more interest. This is a comparison tool, not lending advice.
Worked example. Borrow $40,000. HELOC at 8.5 percent: $283.33 a month interest-only for 5 years, then $495.94 a month over 10 years, for $36,513 of total interest; if the rate rises 2 points to 10.5 percent the repayment payment is $539.74. Personal loan at 9.5 percent over 7 years with a 2 percent fee: $653.76 a month, $14,916 of interest plus an $800 fee, $15,716 in all.
Frequently asked questions
Is a HELOC or a personal loan better for a renovation?
It depends on your rate, fees, how long you want to borrow, how much equity you have and how comfortable you are with a variable rate and your home as security. Enter both offers and compare payment and total cost.
How does a HELOC draw period work?
In a typical structure you can borrow and pay only interest during the draw period, then repay principal and interest over the repayment period. Your lender sets the actual terms.
Why does the HELOC show a stress test?
HELOC rates are often variable, so the payment can rise. The stress test shows the repayment-period payment at a higher rate you choose.
Does a lower monthly payment mean a cheaper loan?
Not always. A longer term lowers the payment but usually raises total interest, so compare the total cost as well.
Sources
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- Method: arithmetic on the numbers you enter. No outside data or published figures are used.
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Planning note
Estimates only, not financial or lending advice. Rates, fees, terms and approval depend on your lender and your situation. A HELOC is secured by your home.