Cash-out refinance to renovate or build: your loan options

The short answer

You can pay for a renovation with a cash-out refinance, but the cash is limited to 80% of your home's current value (Fannie Mae and FHA, one-unit primary home). Renovation loans can lend against the after-renovation value instead: Fannie Mae HomeStyle allows renovation costs up to 75% of the as-completed value on a refinance (Selling Guide B5-3.2-02), and FHA's Limited 203(k) covers up to $75,000 of repairs (HUD Mortgagee Letter 2024-13). To build on land you own, a single-close construction-to-permanent loan is the usual route.

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Key numbers

Cash-out refinance: Up to 80% of current value
HomeStyle refinance: Renovation up to 75% of as-completed value
FHA Limited 203(k): Up to $75,000 of repairs
Construction period (Fannie Mae): Up to 18 months total

Your options compared

Option	Borrow against	Limits	Best for
Cash-out refinance	Current value	80% LTV on a 1-unit primary home (Fannie Mae, FHA)	Lots of equity now; rate near or below yours
HELOC	Current value	Set by the lender (combined LTV)	Keeping a low first-mortgage rate; drawing as work progresses
Fannie Mae HomeStyle Renovation	As-completed value	Renovation costs up to 75% of the as-completed value on a refinance (75% of the lesser of price plus renovation or as-completed value on a purchase); 50% for manufactured homes	Big remodels with little current equity
FHA 203(k)	After-improvement value	Limited 203(k): up to $75,000 of repairs, no consultant required; Standard 203(k) for larger or structural work, with up to 12 months of payment reserves	Lower credit scores or small down payments
Construction-to-permanent (single close)	As-completed value	Construction periods up to 12 months each, 18 months total; then a permanent loan of up to 30 years (Fannie Mae B5-3.1-02)	Building a new home

Why renovation loans can lend more

A cash-out refinance is based on what the home is worth today. A renovation loan is based on what it will be worth when the work is done (the "as-completed" appraisal), so it can fund a remodel that adds value even if your current equity is thin. The trade-off: the lender controls the money, pays contractors in draws, and reviews bids and plans.

A note on HomeStyle refinances

A HomeStyle refinance is a limited cash-out refinance: you can't take cash out for other uses. Money left over after the work is applied to the loan balance or reimburses documented renovation costs (B5-3.2-02).

Building on land you own

If you already own the lot, Fannie Mae treats a single-close construction-to-permanent loan as a limited cash-out refinance that pays off liens on the lot and funds construction, with the loan-to-value based on the as-completed value. If you're buying the lot with the loan, it's a purchase. The loan converts to a permanent mortgage automatically when construction is finished.

Taxes

Mortgage interest on money used to buy, build or substantially improve the home that secures the loan can be deductible (IRS Publication 936). Interest on cash used for other purposes generally isn't.

Frequently asked questions

Can you use a cash-out refinance for home improvements?

Yes. The cash can be used for anything, including renovations, but you're limited to 80% of your home's current value on a one-unit primary home.

Can you do a cash-out refinance to build a house?

Not usually for new construction on a separate lot. To build, most borrowers use a construction-to-permanent loan, which lends against the finished value. If you own the lot, Fannie Mae treats it as a limited cash-out refinance.

What is a HomeStyle renovation loan?

A Fannie Mae loan that includes renovation costs in the mortgage. Renovation costs can be up to 75% of the as-completed value on a refinance, or 75% of the lesser of price plus renovation or as-completed value on a purchase.

How much can you borrow with an FHA 203(k)?

The Limited 203(k) covers up to $75,000 of repairs (raised from $35,000 for case numbers assigned on or after Nov. 4, 2024). The Standard 203(k) handles larger or structural projects within FHA loan limits.

Is a HELOC or cash-out refinance better for a renovation?

A HELOC usually costs less if your current mortgage rate is low, and you draw only what you need. A cash-out refinance can make sense if your rate is near today's or you want one fixed payment.

Sources

Prepared by the MortgageInfo.us editorial team from primary sources. General education only, not financial, legal, or tax advice. How we research and fact-check.