FHA 203k vs. Home Equity Loan: What’s the Difference?

Renovating your home can be very expensive, so most people need to find a way to borrow the funds. Two options are available for most: Federal Housing Administration (FHA) 203k loan or a home equity loan. However, these two types vary quite a bit. If you aren’t sure which one is right for you, here’s a guide to how they differ.

Equity Requirement

The value of your home matters for a home equity loan. In fact, it’s one of the main ways that a bank considers how much your loan maximum can be. However, for an FHA 203k loan, the home equity of a selected home is small—some homes eligible for 203k loans aren’t even habitable. Because of this, 203k loans use the value of your home based on the improvements made. An FHA representative determines the worth of your home once construction is complete.


When you get a home equity loan, you’re using the value of your home to make repairs; it’s likely that you’ve lived in the home for a year or more. When you take a home equity loan, it’s treated as a second mortgage, and another lien is placed on your home. A 203k loan contains your mortgage, so only one lien will be put on your home. The price of the remodel and purchase of the home lumps into one sum.

Interest Rate

The interest rate on home equity loans varies. It can be higher or lower than your mortgage rate and is based on many factors including your income, the amount of debt you have, your credit history, and more. Interest rates for an FHA 203k loan follow the mortgage market and often reflect what you may see for a regular mortgage. When the market is favorable for home-buyers, rates for home improvement loans may also be favorable.


If you’re looking to take out a home equity loan, you can check with any banks and credit unions where you meet the requirements—you can even get some home equity loans online. However, an FHA 203k loan requires you to find an FHA-approved lender or bank.

Length of Loan

The term of a home equity loan can be as short as five years or as long as 30. Typically, most home equity loans have a payment period of 15 years. An FHA loan includes your mortgage so the term limit can be anywhere from 15 to 30 years.

Financial Needs

A home equity loan can be used to pay off debt, make repairs to your home, or pay for schooling. You can use this type of loan for any needs that you see fit. However, an FHA 203k loan goes for the renovation of a home. Every purchase is approved by your FHA representative to ensure that the loan is going toward the repair of the home—FHA 203k loans also don’t cover any luxury purchases.