Home Improvement

What’s the difference between a home renovation and a remodel?

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If you’re planning to make some changes to your home, you may think you have a simple home renovation on your hands. That may not be the correct assumption, though, because depending on the size and scope of what you plan to do, you could have a full remodel on your hands without realizing it.

It’s important to understand the difference between a remodel versus renovation, as each one comes with a different range of costs, time frames and even permit requirements. So, if you’re getting ready to revamp your home, educate yourself on a remodel versus renovation before you take your project on.

Renovation versus remodel

Though often used interchangeably, a home remodel and a home renovation are very different from each other.

When you think of a home renovation, it’s best to think of it as a refresh — kind of like it’s an ‘“out with the old, and in with the new” scenario. A renovation typically entails projects that homeowners choose to do themselves, like painting, changing the hardware on kitchen cabinets and updating lighting. These projects are “spruce-ups” for the aesthetics of your home. Home renovations don’t break the bank and are often started and finished on the same weekend.

When you think of a remodel, it’s easiest to think of it as a reconstruction. A home remodel usually involves professionals, like a professional electrician, a plumber or even an architect. It also usually involves obtaining permits before the project starts.

A remodel may include raising a ceiling, moving a bathtub to a new wall, adding an extension or new room or even installing a kitchen island, complete with plumbing and electricity. Remodeling a home is not a simple affair. It’s quite an undertaking, and can be expensive depending on the size and scope of the changes.

The cost of a remodel versus renovation

A simple renovation can often be done for just a few hundred dollars. After all, paint supplies and light fixtures can be fit into just about any budget. A home remodel, on the other hand, may cost thousands of dollars.

Remodel costs typically range from $18,162 to $76,200, and the national average is about $46,692, according to HomeAdvisor. Of course, the size of your house and the type of materials you use will greatly impact the price.

Renovate versus remodel: which is the best for you

It’s typically best to only spend money renovating or remodeling rooms you frequently use, and you should consider how long you plan to stay in your home. If a move is in the foreseeable future, a simple renovation is probably the best option for you. The smallest touches can change a room’s energy.

If it’s your forever home and the changes will increase the home’s functionality, a home remodel could be the better choice. For example, if you frequently host large dinner parties but have a tiny dining room and kitchen, it would make sense to do a large-scale remodel of that area to make it more functional for your needs.

Take a look at your budget, motivations and future intentions with the home before deciding how much money you want to spend and where you want to spend it.

How to finance a remodel or renovation

There are many ways to finance remodels and renovations, but many homeowners opt for a personal loan, a home equity loan or a home equity line of credit (HELOC).

Personal loan

You can often get a personal loan in an amount that is greater than any credit card limit, and it will probably also have a lower interest rate than a credit card. For this reason, personal loans are a great way to finance any major housing project you take on. Rates fluctuate with personal loans, but interest rates currently run from 3 percent to 36 percent depending on a number of factors, including your overall financial picture and your credit score. Terms for personal loans typically range from one to seven years with limits of up to $100,000.

Home equity loan

If you have equity built up in your home, a home equity loan may outperform personal loan rates and could also be easier to obtain. A home equity loan uses a portion of the equity you’ve accrued in your home to secure a lump-sum loan that can be paid back over a long term. This type of loan works well for large remodels, as you can borrow a significant amount of money at a low interest rate. The downside is that your home will be used as collateral for the loan if you can’t repay it.

The amount you can borrow depends on your home’s loan-to-value (LTV) ratio. Let’s say a lender is willing to lend up to 85 percent of your home’s value, minus the amount left on your mortgage. If your home appraises for $200,000 and your mortgage balance is $130,000, that would mean you may qualify for up to $40,000.

$200,000 (home value) X 0.85 (85%) = $170,000 (85% of home value)

$170,000 (85% of home value) – $130,000 (mortgage balance) = $40,000

$40,000 = maximum loan amount

Lenders will also look at other factors, like your credit score and debt-to-income ratio, to determine if you’re eligible to borrow against your equity.

Home equity line of credit

A HELOC lets you borrow against your home equity like a home equity loan, but it’s structured more like a credit card. If you qualify, you’ll be given access to a line of credit equivalent to a portion of your home equity that you can draw from as needed. Many people doing home remodels choose HELOCs over home equity loans because the former gives them more financial flexibility. It’s a great solution for projects that don’t have a finite price tag, or for projects that could end up being a larger scale than first expected.

Most lenders let you borrow up to 85 percent of your home’s appraised value minus what you still owe on your mortgage. The draw period is usually around 10 years, and you’re only required to pay interest on any amount you borrow during that time. You can also repay the principal during the draw period to replenish your line of credit and then borrow again. After the draw period is over, you’ll make regular monthly payments on both interest and the principal.

For example: If your home appraises for $300,000 but you still owe $200,000 on it, you could potentially get a home equity line of credit for $55,000.

Home appraisal: $300,000

85% of home appraisal: $255,000

Remaining mortgage: $200,000

85% of appraisal minus remaining mortgage: $255,000 – $200,000= $55,000

HELOC potential: $55,000

The bottom line

The difference between renovation and remodeling may not sound like much, but there’s a big difference when it comes to your time and money. It’s important to decide what you need before you sign on the dotted line and start the work, or it could cost you more in the long run.

Written by
Lauren Ward
Insurance Contributor
Lauren Ward has nearly 10 years of experience in writing for insurance domains such as Bankrate, The Simple Dollar, and Reviews.com. She covers auto, homeowners, and life insurance, as well other topics in the personal finance industry.
Edited by
Associate loans editor