HELOC vs. Construction Loan: Financing Options to Build a New Home

Can you open a home equity line of credit (HELOC) to finance new construction? In short, yes, you can. If you’d like to use a HELOC for construction, as long as you’re a homeowner and have established sufficient equity in your home, you may be eligible.

Here, we’ll explain whether you can—or even should—use a HELOC for new construction, given your circumstances. You’ll also get a rundown of the best HELOCs available to homeowners, and how they work so, you’ll know whether this is the right option for your future project.

Table of Contents

1. Can you use a HELOC to build a new house? 
2. Constructions loans vs. HELOCs
3. Best HELOCs for new construction

Can you use a HELOC to build a new house? 

Yes, you can use a HELOC to build your new home. Acting as a second mortgage, a HELOC allows you to borrow against the equity in your home in the form of a revolving credit line, similar to a credit card. With many HELOCs, you can borrow as much as you need when you need it, as long as it’s within the draw period—the time frame you’re allowed to borrow funds.

If you’re financing new construction with a HELOC, you’ll leverage your current home’s equity as collateral. You can use the funds you need—often through a card or check the lender provides you—as your building project progresses, a solid benefit if you run into unexpected costs.

HELOCs offer long repayment terms, often 20 years, but many have variable interest rates that can fluctuate. Your payments may vary as you repay the loan, so be sure you understand the terms to decide whether it aligns with your long-term financial plans.

You can find a HELOC at a bank, credit union, or other lending institution. To qualify, you’ll often need at least 15% equity in your home, and you may only be able to borrow 80% to 90% of your equity.

Constructions loans vs. HELOCs

HELOCs and construction loans both give you extra capital to fund projects. HELOCs give you immediate access to necessary capital, but you must own a home to use a HELOC. Meanwhile, you only receive construction loan proceeds as you reach project milestones.

Construction loans have fixed interest rates, while HELOCs have variable rates. Fixed interest rates offer more predictability, while variable rates tend to start off lower. Construction loans also have much shorter terms than HELOCs.

HELOCs are also easier and quicker to obtain. It can take two to six weeks to obtain a HELOC, while you often must wait 30 to 60 days for a construction loan. Both financial products require appraisals, but construction loans require more paperwork. 

	HELOC	Construction loan
Funding	Based on home equity	Based on project milestones
Interest rates	Lower initially, may increase later	Fixed rates for the duration
Qualifications	Equity in your current home	Detailed plans and timelines
Flexibility	Borrow as needed	Limited to construction costs only
Repayment terms	Long-term, often 20 years	Short-term, typically 3 – 5 years

Rates and FICO score requirements 

Construction loan rates typically range from 4% to 15% APR, while HELOC rates usually range from 4% to 18% APR. 

You can get each loan with a 620 FICO score, but a 680 FICO score will significantly improve your chances of getting approved. A good credit score will make it easier to get a loan and qualify for the lower end of the APR range. 

If you want to borrow more money, you may want to use a construction loan. These loans are based on a property’s future value instead of how much equity you have tied up to an existing property.

How much it costs to build a home

According to Autodesk, the average cost to build a home in the United States ranges from $100 to $200 per square foot. The median price of around $150 per square foot suggests a $300,000 price tag for a 2,000-square-foot construction.

Homeowners with enough equity can save money with a HELOC. However, they should gradually use their credit lines for home construction instead of using them all at once. Gradual spending can help you keep costs under control and ensure that you don’t deplete your HELOC too early.

Construction loans have safeguards to minimize the likelihood of overspending. For instance, you must clear benchmarks within the home construction project before receiving more funds. Home construction lenders don’t give you everything at once. 

When to use a HELOC

For most homeowners and investors, HELOCs are the better option. These lines of credit have lower interest rates and fees than construction loans, quicker funding times, and less paperwork. 

HELOCs also give you more time to repay the debt. You can get a term of up to 20 years instead of opting for a three—to five-year term with a construction loan.

You also don’t have to jump through any hoops to access your capital once approved. You can immediately tap into your entire credit line. If necessary, you can also use HELOC proceeds for expenses outside of construction. 

Example of using a HELOC

A homeowner with a $1 million property and $500,000 in home equity can borrow up to $300,000 to maintain an 80% loan-to-value ratio. The homeowner doesn’t have to use the $300,000 right away, and it only accrues interest when they borrow against it.

If the homeowner only needs to spend $250,000 on the construction, they still have $50,000 remaining on their credit line. These funds can be used for any expense, such as debt consolidation or college tuition. HELOCs offer more flexibility than construction loans.

However, the homeowner will need a different type of loan to continue the project if they burn through their HELOC funds before completing it. They’ll also have less home equity. Furthermore, the monthly HELOC payments will go up after the draw period concludes in five to ten years.

I like HELOCs over fixed loans for new construction because you only pay interest on the amount you need, not how much you are loaned.

When to use a construction loan

While HELOCs are optimal in most cases, they aren’t always practical. Homeowners who recently bought their homes don’t have much equity, so a construction loan may be the better—or only—option. 

Construction loan providers let you borrow money based on the property’s future value instead of your current equity. This detail becomes more significant for people who want to build new homes from scratch and don’t have enough home equity. 

The shorter term can also be beneficial for some homeowners. While a shorter term increases monthly payments, you also won’t pay as much interest in the long run. People with more room in their budgets can pay it off sooner instead of being stuck with it for up to 20 years.

Example of using a construction loan

A qualifying homeowner can borrow a $1 million construction loan even if they don’t have much equity in their primary residence. This loan gives them more flexibility on what type of construction they pursue, but the money comes in drips.

You receive additional funds from the loan based on reaching milestones, such as setting the foundation for your construction project. Lenders will inspect the building during each checkpoint. 

Loan payments are generous interest-only payments in the beginning to minimize expenses. After the construction is complete, you must pay the interest and principal. You’ll pay more interest on this loan, but the low initial expenses will make it easier to proceed with the project.

When we advise clients on the best way to fund the building of a new home, the route we recommend depends on various factors, such as interest rates on the construction loan and HELOC and the anticipated costs needed to complete the project. Further, you need to know how much equity exists in the current home and consider other financing options, such as investments, cash, or even a 401(k) loan.

Best HELOCs for new construction

Getting a HELOC for a new construction gives you fewer obstacles and can be much cheaper than a home construction loan. These are some of the top HELOC providers to consider.

Figure

Best Overall

4.9 _/5

View Rates

How to use a Figure HELOC for new construction

Figure works well for people who need quick financing for construction projects that can take several years. 30-year terms offer plenty of flexibility to prolong the project, but you have to be willing to learn how blockchain technology works to use Figure

You can access up to $400,000, a higher amount than most lenders. You also don’t have to go through the appraisal process since Figure automatically calculates your home’s value.

Rates (APR)	7.35% – 16.50%
Term length	Up to 30 years
Maximum loan amount	$400,000
Funding time	As little as five days

Aven

Best Customer Reviews

4.8 _/5

View Rates

How to use an Aven HELOC for new construction

Aven converts your home equity into a credit card with unlimited 2% cash back and competitive rates. You can receive quick funding and hit the ground running for your construction project.

You can also use the credit card for other financial obligations. Plus, it’s better to use this card for construction transactions instead of a traditional credit card with a rate as high as 30% APR.

Rates (APR)	7.49% – 14.99%
Term length	N/A
Maximum loan amount	$250,000
Funding time	As little as 15 minutes

Bethpage FCU

Best Credit Union

4.7 _/5

View Rates

How to use a Bethpage HELOC for new construction

Bethpage offers the lowest rates for qualifying borrowers. Only having a 6.99% APR for the first year can keep construction costs lower initially. You also have the flexibility to choose a term length ranging from five years to 20 years.

This HELOC works best for someone who already has a lot of equity in their home. The maximum loan amount is 70% of your home’s value. However, an existing mortgage will reduce how much you can borrow from a Bethpage HELOC.

Rates (APR)	6.99% – 18.00%
Term length	5, 10, or 20 years
Maximum loan amount	Up to 70% of your home’s value
Funding time	Within 35 days

LendingTree

Best Marketplace

4.5 _/5

View Rates

How to use a LendingTree HELOC for new construction

LendingTree is a lending marketplace that connects individuals with many lenders. You can map out your specific construction needs and look for a HELOC that aligns with your plans.

For instance, you can borrow up to $1 million from some lenders on LendingTree, but the other three lenders on this list don’t let you borrow that much. You will have to compare several lenders to get the best deal. However, LendingTree’s many options make finding the optimal HELOC for your project easier.

Rates (APR)	6.63% – 18.00%
Term length	Up to 30 years
Maximum loan amount	Up to $1 million
Funding time	Varies for each lender

How we rated our HELOC recommendations for new construction

Since 2018, LendEDU has evaluated home equity companies to help readers find the best home equity loans and HELOCs. Our latest analysis reviewed 850 data points from 34 lenders and financial institutions, with 25 data points collected from each. This information is gathered from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives.

These star ratings help us determine which companies are best for different situations. We don’t believe two companies can be the best for the same purpose, so we only show each best-for designation once.

Recap of HELOCs for new construction