Renovation Loans Explained: How to Fund Your Remodel Without Touching Your Low Mortgage Rate
If you’re a homeowner thinking about remodeling, building an addition, or adding an ADU, chances are financing feels intimidating. Many people assume renovation loans are complicated, expensive, or only available through traditional construction loans filled with inspections, draw schedules, and endless red tape.
The truth? Renovation financing is often much easier and more affordable than most homeowners realize—especially if you understand your options upfront and plan properly.
In a recent episode of Let’s Build with Armada, we sat down with Megan Safara, a Washington-based mortgage broker with Renofi, to break down renovation financing in plain English. What follows is a homeowner-friendly guide to understanding how renovation loans really work, what most people get wrong, and how you can save a significant amount of money while improving your home.
The Biggest Mistake Homeowners Make: Poor Planning
According to Megan, the most common mistake homeowners make isn’t credit-related or income-related—it’s lack of planning.
Homeowners would never buy a house without getting pre-approved for a mortgage, yet many jump into renovations without exploring financing options first. They assume they’ll pay cash, use a credit card, or “figure it out later.” That’s how people end up halfway through a demo with no funding plan and a gutted house.
The reality is that renovation loans aren’t nearly as difficult as people think. With the right guidance early on, homeowners can feel confident signing contracts, setting budgets, and moving forward without financial stress.
A Quick Mortgage Refresher (At a High Level)
To understand renovation financing, it helps to understand how mortgages are structured.
First Mortgages
Most homeowners have a first mortgage, typically a 30-year fixed loan. This lender holds the first lien on the property, meaning they get paid first if anything goes wrong.
Second Mortgages
A home equity line of credit (HELOC) or home equity loan (HELOAN) is considered a second mortgage. These sit behind the first mortgage and are secured by the equity in your home.
Because second mortgages are riskier for lenders, they usually cap total borrowing at around 80–90% of the home’s value.
HELOC vs. Home Equity Loan: What’s the Difference?
These two are often confused, but they work very differently.
Home Equity Line of Credit (HELOC)
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Revolving line of credit
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Interest-only payments on what you actually use
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Variable rate tied to the prime rate
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Flexible repayment
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Ideal for renovations with phased payments
Home Equity Loan (HELOAN)
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Lump sum paid out all at once
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Fixed interest rate
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Fixed monthly payment
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Less flexible for construction projects
For most renovations, a HELOC is far superior, because you only pay interest on the funds you’ve actually used. This alone can save tens of thousands of dollars over the course of a project.
Why Paying Cash Isn’t Always the Best Move
Even homeowners who can pay cash often shouldn’t.
A renovation HELOC provides:
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A financial cushion for change orders and surprises
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No interest unless funds are used
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Protection against unexpected cost overruns
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Access to capital without draining savings
You don’t have to use the full line—but having it available gives you flexibility and peace of mind.
The Game-Changer: After Renovation Value (ARV)
This is where Renofi’s renovation loan stands apart.
Most banks base lending on your home’s current value (as-is). Renofi uses your home’s after renovation value (ARV) instead.
What Does That Mean?
If you’re planning a major renovation—an addition, ADU, or structural upgrade—Renofi:
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Reviews your plans and budget
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Appraises the home as if the renovation is already complete
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Bases lending limits and rates on that future value
This often results in:
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Higher loan amounts
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Lower combined loan-to-value ratios (CLTV)
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Better interest rates
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More funding flexibility
In short, you’re borrowing against what your home will be worth, not what it’s worth today.
Why Combined Loan-to-Value (CLTV) Matters
CLTV is the total of all mortgages divided by the home’s value.
Lower CLTV = lower risk = better rates.
Because ARV loans use future value, borrowers often qualify for significantly lower rates than traditional HELOCs—even when borrowing the same amount.
Renovations That Add the Most Value
Lenders don’t judge projects based on aesthetics—they look at value.
Projects that typically appraise well:
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Additions that increase square footage
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Bedrooms and bathrooms
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Attached ADUs
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Functional living space improvements
Projects that often add less appraised value:
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Pools
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Landscaping
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Outdoor living spaces
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High-end cosmetic upgrades
That doesn’t mean these projects can’t be financed—it just means homeowners should already have sufficient equity, because appraisers may not credit dollar-for-dollar value.
ADUs and DADUs: What You Should Know
Accessory Dwelling Units (ADUs) are one of the most popular renovation projects today, and Renofi does finance them—with one key limitation:
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One ADU per property for secured renovation loans
The ADU can be:
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Attached or detached
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Used for rental income
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Used for family housing
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Used as office space
While appraised ADU values vary by market, the real benefit often comes from:
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Rental income offsetting loan payments
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Long-term equity growth
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Increased flexibility for future use or resale
Keeping Your Low First Mortgage Intact
One of the biggest advantages of this renovation approach is not having to refinance your first mortgage.
If you’re sitting on a 2–3% rate, refinancing would be incredibly expensive. Renofi’s second-position renovation HELOC allows you to:
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Keep your ultra-low first mortgage
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Borrow only what you need for the renovation
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Maintain a lower blended interest rate overall
For many homeowners, this alone makes the renovation financially viable.
How to Make Yourself More Attractive to a Lender
Before applying, homeowners should:
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Keep credit cards and unsecured debt low
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Pay bills on time
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Gather tax returns and income documentation
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Work with a professional, licensed builder
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Plan the project clearly before applying
Good preparation speeds approvals and improves loan terms.
Final Thoughts: Renovation Financing Doesn’t Have to Be Scary
Renovation loans don’t have to be a headache. With proper planning, the right financing structure, and an understanding of how future value works, homeowners can:
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Preserve their low mortgage rates
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Reduce interest costs
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Increase home value
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Avoid cash flow stress
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Build smarter, not riskier
The key is starting the conversation early—before construction begins.
If you’re considering a renovation, addition, or ADU, understanding these financing options upfront could save you a tremendous amount of money and frustration.
