Paying for a renovation in 2026: HELOC, cash-out refinance, home equity loan, personal loan or cash

The case: a $60,000 kitchen and bath on a $400,000 house

Every number in this guide comes from one household, so the options can be compared line by line. The house is worth $400,000. The first mortgage has a $220,000 balance at 3.25% with 25 years (300 payments) left, which puts the principal and interest payment at $1,072.10 a month. The project is a kitchen and a bathroom that the contractor bid at $60,000. Change any of those inputs and the answer can change, which is why the method matters more than the verdict.

Start with combined loan-to-value, the ratio lenders use for anything secured by the house. Today it is $220,000 ÷ $400,000 = 55%. After borrowing $60,000 against the house it becomes $280,000 ÷ $400,000 = 70%. That 70% matters twice. It is the exact CLTV assumed in Bank of America's published HELOC rate, and it sits under the 80% cap SchoolsFirst FCU publishes for its HELOCs and home equity loans.

How much room the equity gives you, with the lender's appraisal as the value:

Even at the strictest cap the $60,000 fits with $40,000 to spare. That spare room is useful. Renovations run over budget, and a line of credit sized above the bid lets you cover a surprise without a second application. You pay interest only on what you draw.

What each option costs in September 2026

Rates moved this week. The Federal Reserve's H.15 release shows the bank prime rate at 6.75% through September 16 and 7.00% from September 17, 2026, with the effective federal funds rate stepping from 3.63% to 3.88%. Most variable HELOCs, including both lines quoted below, are priced off that prime rate. The same day, Freddie Mac's survey put the 30-year fixed mortgage at 6.95%, up from 6.76% a week earlier and from 6.26% a year ago.

A few notes on reading that table. Bank of America's 8.275% includes a 0.125% autopay discount and a 0.600% discount for drawing $60,000 at opening, on a $100,000 line, for a California property and a borrower with excellent credit. Without the discounts the margin would be 2.00 points over prime. SchoolsFirst quotes for a 720 credit score and lends only on California property; it is here because it publishes its full margin range, which most banks do not. The personal loan rate is the Fed's 24-month average, and longer terms are often priced higher, so treat 11.86% as a floor for a five-year loan. The refinance rate is the survey average for a purchase loan with strong credit. Cash-out loans usually price above it, so every refinance number below flatters the refinance.

The cash-out refinance and the rate you give up

This is the number that decides most renovation financing questions in 2026, and it rarely appears in a lender's quote. A cash-out refinance retires $220,000 at 3.25% and replaces it with a larger loan at 6.95%, so the old cheap balance gets repriced along with the $60,000.

Walk through it. The new loan has to cover the old balance, the $60,000, and closing costs. At 3.5% of $280,000, closing costs are $9,800, so the new loan is $289,800 at 6.95% over 30 years, and the payment becomes $1,918.33. First-year interest on that loan is about $289,800 × 6.95% = $20,141. Keep the old mortgage instead and first-year interest is about $220,000 × 3.25% = $7,150. The difference, $12,991, is what you pay in the first year to get $60,000. Divide by $60,000 and the renovation money effectively costs 21.7% a year, above the 20.94% average credit card rate in the Fed's G.19 release for the second quarter of 2026.

Compare that with borrowing on top of the old loan. Keeping the 3.25% mortgage and adding a HELOC at 8.275% gives a blended rate on the whole $280,000 of ($220,000 × 3.25% + $60,000 × 8.275%) ÷ $280,000 = 4.33%. The refinance charges 6.95% on all of it.

The HELOC's first-year interest on the full $60,000 is $60,000 × 8.275% = $4,965. Solve for the refinance rate that would tie in year one: ($7,150 + $4,965) ÷ $289,800 = 4.18%. With the 30-year average at 6.95%, no refinance quote comes close. Turn the question around and ask how high the old rate would have to be before the refinance ties: ($20,141 - $4,965) ÷ $220,000 = 6.90%. That gives a plain rule for this case. If your current mortgage is at or above roughly today's market rate, a cash-out refinance can make sense, particularly to get out of an adjustable loan. Below that, it is the most expensive option on the list.

Ten-year cost of each option, side by side

To compare fairly, the table below looks at the household's entire mortgage debt over the next ten years in each scenario. The interest column is everything paid in interest and fees over 120 months; the last column is what is still owed after ten years. With no renovation, the old mortgage alone generates $61,226 of interest over the decade and leaves $152,575 owed.

The refinance loses on all three measures at once: the highest payment, about $137,000 more interest than doing nothing, and $95,816 more debt still owed at year ten, because the 30-year clock restarted. Part of that $137,364 is the longer term and part is the rate. Either way it is money the household pays and would not pay under any other option.

The personal loan looks cheaper than the HELOC in dollars, and the reason is the term. Five years of 11.86% on $62,500 (the amount you borrow to net $60,000 after a 4% fee) costs $23,152. A HELOC paid off on the same five-year schedule at 8.275% costs $13,470 at a $1,224.50 payment. At equal terms, the lower rate wins. The personal loan's real appeal is speed and the absence of a lien on the house, and its cost is a monthly payment of $1,385.86 on top of the mortgage.

The HELOC and the home equity loan are close. At the midpoint rate the fixed loan costs about $2,000 more over ten years than a HELOC at 8.275%, mostly the $1,200 closing cost. What you are buying with that $2,000 is a rate that cannot move. The next section prices the alternative.

HELOC payment shock and the prime rate

A HELOC has two phases. During the draw period, usually 10 years, many lines require only interest. SchoolsFirst's HELOC works that way, followed by 15 years of amortization. Bank of America's minimum payment already includes principal: its $452 sample payment on a $60,000 draw matches a 30-year amortization at 8.275%, which works out to $451.81.

On an interest-only line, $60,000 at 8.275% costs $413.75 a month and pays down nothing. After ten years of minimum payments you will have paid $49,650 in interest and still owe $60,000. Then the payment steps up to $512.18 over a 20-year repayment period, 1.24 times the old payment, or to $582.96 over 15 years, 1.41 times. The balance cancels out of that multiplier. Only the rate and the repayment term move it, and it grows as rates fall or terms shorten.

The rate itself is the bigger risk. Here is the same $60,000 with prime two points lower or higher for the life of the loan:

A two-point move either way shifts ten-year interest by about $7,500 to $7,800. At 10.275% the HELOC still costs about a quarter of what the refinance does in this case, so rate risk does not change the ranking against the refinance. It does narrow the gap with a fixed home equity loan: at 10.275% the HELOC's $36,248 is above the fixed loan's $30,470. If a rise of two points would break your budget, pay the extra $1,200 up front and lock the rate.

Read the maximum rate in your agreement too. Bank of America caps its HELOC APR at 24%; SchoolsFirst caps at 18%. Those caps are the worst case written into the contract, and neither is a limit you would want to test.

Run your own balance, margin and repayment period through the HELOC calculator, which uses the same math as this page and shows both payments side by side.

Is the interest tax deductible in 2026?

The rule was due to expire at the end of 2025, and it did not. Section 70108 of Public Law 119-21, enacted in 2025, struck the sunset date from the tax code and made it permanent for tax years beginning after December 31, 2025. Interest on a HELOC, home equity loan or cash-out refinance counts as deductible mortgage interest only for the part of the money used to buy, build or substantially improve the home that secures the loan, and only within the $750,000 total mortgage debt limit ($375,000 if married filing separately), as IRS Publication 936 describes. A kitchen and bath remodel on your main home qualifies. The same loan spent on a car or a credit card balance does not. The same section also lets mortgage insurance premiums count as interest again starting in 2026.

Whether the deduction is worth anything is a separate question. You only benefit if you itemize, and for 2026 the standard deduction is $32,200 for a married couple filing jointly and $16,100 for a single filer. In this case, first-year interest is about $7,064 on the old mortgage plus about $4,815 on a HELOC repaid over ten years, for $11,879 in total. That is a little over a third of the joint standard deduction. Unless the household has large state and local taxes or charitable gifts, it takes the standard deduction and the HELOC interest saves nothing in tax.

If you do itemize, the savings run at your marginal rate. In the 22% bracket, which in 2026 starts at $100,800 of taxable income for joint filers, an 8.275% HELOC costs 8.275% × (1 - 0.22) = 6.45% after tax. Personal loan interest is not deductible at all. Keep the contractor invoices with your tax records, because the deduction depends on what the money bought, whatever the loan is called.

What paying cash really costs

Cash has a cost too: whatever that money would have earned. The honest yardstick is a safe, liquid yield. On September 17, 2026 the 1-year Treasury paid 4.40% and the 3-month bill 4.12%. The FDIC's national average savings rate was only 0.38% in August, so money sitting in an ordinary savings account is earning almost nothing.

To compare with a loan repaid over ten years, run the same schedule at 4.40%. The forgone earnings come to $14,273 over the decade, against $28,406 of interest on the HELOC. If the money would otherwise sit at 0.38%, paying cash costs $1,157 in lost interest. Both figures are before tax, and Treasury interest is federally taxable, which tilts the result further toward cash.

The one reason to borrow while holding cash is liquidity. Emptying savings for a remodel leaves no reserve for a job loss, a medical bill or the rotted subfloor the demolition uncovers. A workable middle path is to pay cash for the bid and open a HELOC you do not draw. At Bank of America an undrawn line has no closing costs, but closing it within 36 months triggers a $450 fee; at SchoolsFirst the $50 annual fee is waived with autopay. Some lenders also restrict timing: SchoolsFirst requires you to wait for the loan to fund before any work starts, so line up the financing before the contractor's start date. If you are parking the reserve, a CD calculator shows what a fixed term would earn on it.

Which option wins under which conditions

Before you sign anything, get the lender's actual quote for your credit score and CLTV, write down the margin over prime and the lifetime cap for any variable line, and redo the effective-rate arithmetic above with your own balance and rate. The only inputs are your current balance and rate, the new rate and the closing costs. This is not personal financial advice; check the terms your lender actually offers.