Planning to spruce up your home? Renovation and remodeling are hitting record levels, with homeowners expected to spend $400 billion by just the third quarter of this year, according to a quarterly study by the Joint Center for Housing Studies at Harvard University.

Before you take on a new project, it’s important to understand the differences between a remodel versus renovation. Not only does each one come with its own range of costs, time frames and permit rules, but they may also differ in the value you’ll recoup from your investment. Considerations like these can help guide your decision and determine the scope of the project you choose.

Renovation versus remodel

Though often used interchangeably, a home remodel and a home renovation have different meanings.

When you think of a home renovation, it’s best to think of it as a refresh, or minor makeover. 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, or major undertaking. A home remodel usually involves hiring professionals, like an electrician, plumber or architect. It also usually involves obtaining permits before the project starts and passing inspections during it.

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 a commitment 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 and renovation costs average $46,891, with most home projects ranging from $18,009 to $76,499, according to HomeAdvisor. Breaking it down further, the data show that home remodels may cost anywhere from $5,000 to $150,000 or more. Home renovations cost $10 to $60 per square foot on average and could approach $150 per square foot depending on the room and your location. In addition, the size of your house and the type of materials used will also impact the price.

Renovate versus remodel: which is the best for you

When deciding which home upgrades to prioritize, it pays to consider which projects will deliver the biggest return on your investment. Some changes will increase your home’s value and equity more than others.

For instance, you’ll recoup 93.8% of what you spend to replace a garage door, but 47.7% of what you invest in making an upscale master suite addition, according to Remodeling’s 2021 Cost vs Value Report. This analysis compares the average cost of 22 home remodeling projects and the estimated value each project retains. You can use this annually updated information to gauge the remodel or renovation value you’re likely to see if you are building home equity or looking to sell.

On top of the value impact, there are other factors to weigh as well. For example, 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 may be 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.

Evaluate your budget, motivations, value payoff and future intentions with the home before deciding on the extent of the project, 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 less expensive way to finance any major housing project you take on. Rates fluctuate with personal loans, but interest rates currently range from 7 percent to 36 percent, depending on the lender and other factors like your income, debt-to-income ratio and credit score. Personal loan terms can range from one to 12 years, with loan amounts varying from as little as $600 to as much as $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

Renovation and remodeling have important differences when it comes to the time, cost and financing method involved  What’s more, you’ll want to consider which projects will give you the largest return on your investment – and contribute to the value of your home.