Should You Use a HELOC or a Home Equity Loan for a Remodel?

On September 16, 2026, the Federal Reserve's policy committee voted 12-0 to raise its target range for the federal funds rate by a quarter point, to 3.75%-4% (FOMC statement). The change took effect September 17 (Fed implementation note), and Bank of America moved its prime rate to 7.00% that same day (Bank of America). If you have a $40,000 kitchen or roof bid on the table, the HELOC vs home equity loan decision shifted a little. It didn't shift as much as some headlines suggest, though, and for some borrowers it hardly shifted at all.

Here's what changed, what the rate averages really say, and how to pick between a HELOC, a fixed home equity loan, cash, or the financing your contractor offers.

Is a HELOC or a home equity loan better for a remodel?

Short answer: a HELOC tends to fit staged projects you plan to pay off quickly, and a fixed home equity loan tends to fit one lump-sum bid you'll pay off over many years. Your credit score and how much equity you have will decide the rate you're offered more than the Fed's quarter point will.

The two products work differently. The Consumer Financial Protection Bureau describes a HELOC as "an 'open-end' line of credit that allows you to borrow repeatedly against your home equity" (CFPB). Most HELOCs have variable rates. A home equity loan pays you one lump sum at a fixed rate, and the payment stays the same for the whole term.

Did the Fed hike raise HELOC rates?

If you already have a HELOC, probably yes. Bankrate notes that "Most HELOCs are tied to the prime rate and typically adjust higher or lower following the Fed's moves" (Bankrate). On a $40,000 balance, each quarter-point rise in prime adds about $8.33 a month (roughly $100 a year) to an interest-only payment.

If you're shopping for a new HELOC, the picture is murkier, because the two big averages disagree:

• Bankrate (September 23): the national average HELOC rate is 7.28%. Bankrate says its $30,000 HELOC average "rose 17 basis points to 7.28%" after the hike, calling it "their biggest jump of the year."

• Curinos, via Yahoo Finance (September 25): "The average HELOC adjustable rate is 7.09%, a new 2026 low" (Yahoo Finance).

They aren't measuring the same borrower. Bankrate surveys the 10 largest banks and thrifts in 10 large markets and assumes a FICO score of 700 and 80% combined loan-to-value. The Curinos figures assume a credit score of at least 780 and combined loan-to-value below 70%. A strong-credit borrower with lots of equity will see quotes closer to the lower number.

What are home equity loan rates right now?

Same story, two borrower profiles:

• Curinos via Yahoo Finance (780+ credit, under 70% CLTV): the average fixed home equity loan is 7.42%, "up from its 2026 low of 7.31% in late June."

• Bankrate (FICO 700, 80% CLTV, $30,000 loan, September 23): 8.39% for 5 years, 8.49% for 10 years and 8.46% for 15 years. Those rose 24, 18 and 20 basis points week over week after the hike (Bankrate).

So if someone tells you home equity loans are "around 7.4%," that's the Curinos average for top-tier borrowers. With a mid-700s score and less equity, plan around the Bankrate numbers.

How much is the monthly payment on a $40,000 home equity loan or HELOC?

We used standard amortization and each source's average rate to calculate these. Your actual quote will depend on your credit, equity and lender, so treat these as ballpark figures, not offers.

A longer term lowers the payment but costs more overall. At 7.42%, total interest comes to about $16,800 over 10 years versus about $26,400 over 15 years.

For scale: the most recent Cost vs. Value report (Zonda's 2025 edition) puts a national minor kitchen remodel at $28,458, with 112.9% of the cost recouped at sale (PR Newswire). A $40,000 bid means a bigger job than that typical minor remodel, so read the scope line by line before you borrow for it.

When does a HELOC make more sense?

• Staged projects. You draw as invoices come in (deposit, rough-in, finish) and only pay interest on what you've used.

• A short payoff plan. If you'll clear the balance in a couple of years, the lower interest-only payment works in your favor.

• You can live with rate changes. Each quarter-point move in prime changes your cost.

Know the catch. Per the CFPB, the draw period typically runs 10 years, then a repayment period of 10-20 years begins with significantly higher monthly payments. In our table, that's the jump from about $243 to about $470. Some plans let you convert part of the balance to a fixed rate, which is typically higher. And the CFPB's plain warning applies to both products: "If you fall behind or can't repay the loan on schedule, you could lose your home."

When does a fixed home equity loan make more sense?

• One lump-sum bid. A roof tear-off or a single-contract kitchen is billed as one job, so you don't need a line to draw from.

• A long payoff. If you need 10-15 years, locking the rate means future Fed moves won't touch your payment.

• Budget certainty. Same payment every month.

Budget for closing costs. Consumer Reports' 2018 reporting put home equity loan closing costs "typically from 2 to 5 percent of the loan" (Consumer Reports). On $40,000, that's $800 to $2,000. Ask each lender for its current fee breakdown in writing.

Is it better to pay cash for a remodel?

For many savers, yes, as long as you keep an emergency cushion. The FDIC's national average savings rate was 0.37% as of September 21, 2026 (money market 0.63%, 12-month CD 1.73%) (FDIC). $40,000 sitting in an average savings account earns about $148 a year. Borrowing the same $40,000 at 7.42% costs roughly $2,900 in first-year interest. Unless your savings earn far above average, paying cash usually wins on cost.

The exception is when paying cash would drain your safety net. A remodel that leaves you nothing for a surprise furnace or plumbing repair is a risky trade.

One tax note: IRS Publication 936 says you "can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren't used to buy, build, or substantially improve your home" (IRS Pub. 936). Put the other way, interest on a HELOC or home equity loan used for a qualifying remodel may be deductible if you itemize. Check with a tax professional before you count on it.

Is contractor financing a good deal?

Sometimes, but only if it's a true 0% promotion you can pay off in full before it ends. Consumer Reports explains that "Your home contractor may offer a loan for, say, 12 to 18 months. Typically this is done through a third-party lender."

Watch for deferred interest. The CFPB warns: "If any promotional balance remains when the promotional period ends, consumers are charged accrued interest on the promotional balance from the time of purchase." It adds that "The minimum payment due alone may not be enough to pay off the balance by the end of the period."

Do the math yourself. Divide the balance by the number of promo months. On $40,000, that's about $3,333 a month over 12 months or about $2,222 over 18 months. If you can't comfortably pay that, the promo is a trap, not a discount.

What to ask your contractor about financing

• Is the financing through a third-party lender? Which one?

• What rate applies after the promotional period, and is interest deferred back to the purchase date?

• Does the price change if I pay cash or bring my own financing?

• What's the deposit, and what's the draw schedule tied to? (This tells you whether a HELOC's staged draws fit.)

Keep the financing decision separate from the bid itself. A good price on the loan doesn't fix an inflated scope, and a great contractor doesn't need to make money on your financing. Verify the contractor's license and insurance, and get the scope, price and payment schedule in writing before any money moves.

The bottom line: how to decide this week

• Get the contractor bid first. Know the real number and whether it's paid in stages or as one lump sum.

• Get two quotes from your own bank or credit union: a HELOC and a fixed home equity loan. Ask for the rate, fees and, for the HELOC, the margin over prime.

• Compare against the payment table above. If your quotes land near the Curinos numbers, you're getting top-tier pricing. If they land near Bankrate's, that's typical for a 700 score and 80% loan-to-value.

• Check your cash position. If you can pay cash and still keep an emergency fund, that's usually the cheapest route.

• Treat contractor promos as a payoff test. Divide by the promo months. If the payment works, it can be a good deal. If it doesn't, skip it.

Related reading

• Belt, Chain or Wall-Mount Garage Door Opener: Which Is Quietest for the Money?

• Should You Still Replace the Furnace Before a Warm Winter Forecast?

• When California's New Fire Rules Reach Your Wood Fence

• Vetting a Storm Repair Crew Before You Sign

• Florida's License Lookup Says 'Active.' A New Investigation Explains Why That Doesn't Mean 'No Complaints.'

• The Crew That Didn't Show Up: 349,000 Missing Workers and Why Your Start Date Keeps Sliding

• More General Contractors coverage

Sources

• Federal Reserve: FOMC statement, September 16, 2026

• Federal Reserve: Implementation Note, September 16, 2026

• Bank of America: Prime Rate Information

• Bankrate: Current HELOC Rates

• Bankrate: Current Home Equity Loan Rates

• Yahoo Finance: HELOC and home equity loan rates (Curinos data), September 25, 2026

• CFPB: What is a home equity line of credit (HELOC)?

• CFPB: Bureau encourages more transparent promotions (2017)

• Consumer Reports: How to Finance a Home Improvement Project (2018)

• IRS Publication 936 (2025): Home Mortgage Interest Deduction

• FDIC: National Rates and Rate Caps

• PR Newswire: Zonda's 38th Annual Cost vs. Value Report

Note: This article contains AI-assisted content and has been reviewed by our editorial team.

ABOUT THIS SERVICE: CallTheLocal.com is a directory and lead generation service, not a contractor or service provider. Submitting this form does not obligate you to hire anyone or purchase any service. Your information will be shared with licensed, insured home service professionals in your area who may provide quotes for your project. CallTheLocal.com does not guarantee the quality, timeliness, or outcome of any work performed by service providers you connect with through this service. Always verify licensing, insurance, and references before hiring. Get everything in writing before work begins.