Maybe you’ve spent a serious amount of time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps you have an entire Pinterest board full of super-deep soaking tubs that you’re dreaming about.
Either way, the home improvement bug has bitten you, and you’re hardly alone. In the U.S. $827 billion was spent on home improvement from 2021 to 2023, according to the U.S. Census Bureau American Housing Survey. For a bit more context, consider that the average American spent more than $9,542 on home improvement projects in 2023 — with spending up 12% over 2022. That’s a lot more than just buying a new bathroom sink.
While your home might be begging for some updates and improvements, not all of us have close to $10,000 stashed away in a savings account. For many people, realizing their home improvement goals means borrowing money. But how exactly?
Read on to learn about some of your options, including a home equity loan, a home equity line of credit (HELOC), and a home improvement loan. We’ll share the situations in which home equity loans, HELOCs, and home improvement loans work best so you can figure out which home improvement loan option is right for you.
Key Points
• Home equity loans, HELOCs, and personal home improvement loans offer different benefits for financing renovations.
• Home equity loans provide a lump sum with fixed interest rates, using home equity as collateral.
• HELOCs offer flexible access to funds up to a certain limit during a set period, with variable interest rates.
• Personal home improvement loans are unsecured, typically quicker to obtain, and may have higher interest rates.
• Choosing the right financing option depends on the borrower’s equity, the amount needed, and preferred repayment terms.
What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?
If you’ve figured out how much a home renovation will cost and now need to fund the project, the options can sound a bit confusing because they all involve the word “home.”
What’s more, you may hear the term “home equity loan” loosely applied to any funds borrowed to do home improvement work. However, there are actually different kinds of home equity loans to know about, plus one that doesn’t involve home equity at all.
So, before digging into home improvement loans vs. home improvement loans vs. HELOCs, consider the basics for each:
• A home equity loan is a lump-sum payment that a lender gives you using the equity in your home to secure the loan. These loans often have a higher limit, lower interest rate, and longer repayment term than a home improvement loan.
• A home equity line of credit, or HELOC, is a revolving line of credit that is backed by your equity in your home. It operates similarly to a credit card in that the amount you access is not set, though you will have a limit on how much you can access.
• A home improvement loan is a kind of lump-sum personal loan, and it is not backed by the equity you have in your home. It may have a higher interest rate and shorter repayment term than a home equity loan. What’s more, it may have a lower limit, making it well suited for smaller projects.
Worth noting: If you use your home as collateral to borrow funds, you could lose your property if you don’t make payments on time. That’s a significant risk to your financial security and one to take seriously.
Next, here’s a look at how key loan features line up for these options.
How Much Can I Borrow?
The sky isn’t the limit when borrowing funds. This is how much you will likely be able to access:
• For a home equity loan, you can typically borrow up to 85% of your home’s value, minus what’s owed on your mortgage. So if your home’s value is $300,000, 85% of that is $255,000. If you have a mortgage for $200,000, then $255,000 minus $200,000 leaves you with a potential loan of $55,000. You can do the math quickly with a home equity loan calculator.
• For a HELOC, you can often access up to 90% of the equity you have in your home, though some lenders may go even higher. In that case, you are likely to pay a higher interest rate. In the scenario above, with a home valued at $300,000 and a mortgage of $200,000, that means you have $100,000 equity in your home. A loan for 90% of $100,000 would be $90,000. As with other lines of credit, your credit score and employment history will likely factor into the approval decision. To figure out what payments might be on a HELOC, you can use a HELOC repayment calculator.
• For a home improvement loan, the amount you can borrow will depend on a variety of factors, including your credit score, but the typical range is between $3,000 and $50,000 or sometimes even more.
What Can the Funds Be Used for?
Interestingly, some of these funds can be used for purposes other than home improvement costs. Here’s how they stack up:
• For a home equity loan, you can certainly use the funds for an amazing new kitchen with a professional-grade range, but you can also use the money for, say, debt consolidation or college tuition.
• For a HELOC, as with a home equity loan, you can use the money as you see fit. Redoing your patio? Sure. But you can also apply the cash to open a business, pay for grad school, or knock out credit card debt.
• For a home improvement loan, there is often the requirement that you use the funds for, as the name suggests, a home improvement project, such as adding a hot tub to your property. In some cases, you may be able to use the funds for non-home purposes. Your lender can tell you more.
Recommended: How to Find a Contractor for Home Renovations & Remodeling
How Will I Receive the Funds? How Long Will It Take to Get the Money?
Consider the different ways and timing you may encounter when getting money from these loan options:
• With a home equity loan, you receive a lump sum payment of the funds borrowed. The timeline for getting your funds can be anywhere from two weeks to two months, depending on a variety of factors, including the lender’s pace.
• With a HELOC, you open a line of credit, similar to a credit card. For what is known as the draw period (typically 10 years), you can withdraw funds via a special credit card or checkbook up to your limit. It typically takes between two and six weeks to get the initial approval, but some lenders may be faster.
• With a home improvement personal loan, you receive a lump sum of cash. These tend to be the quickest way to get cash: It may only take a day or so after approval to have the funds available.
How Much Interest Will I Pay?
How much you pay to access funds for your project will vary. Take a closer look:
• For a home equity loan, you typically get a lower interest rate than some other loan types, since you are using your home equity as collateral. These are typically fixed-rate loans, so you’ll know how much you are paying every month. At the end of 2024, the average rate of a fixed, 15-year home equity loan was 8.49%.
• For a HELOC, the line of credit will typically have a rate that varies with the prime rate, though some lenders offer fixed-rate options. HELOCs may have lower interest rates than personal and home equity loans, but you will need a high credit score to snag the lowest possible rate.
• For home improvement loans, which are a kind of personal loan, rates vary widely. Currently, you might find anything from 6.99% to 36% depending on the lender and your qualifications, such as your credit score. These loans are typically fixed rate.
How Long Will I Have to Repay the Funds?
Repayment terms differ among these three options:
• For home equity loans, you will agree to a term with your lender. Terms typically range from five to 20 years, but 30 years may be available as well.
• With a HELOC, you usually have a draw period of 10 years, during which you may pay interest only. Then, you may no longer withdraw funds, and move into the principal-plus-interest repayment period, which is often 20 years.
• With a home improvement personal loan, your repayment terms are typically shorter than with the other options and will vary with the lender. You may find terms of anywhere from one to seven years or possibly longer.
Here’s how these features compare in chart form:
| Feature | Home Equity Loan | HELOC | Home Improvement Personal Loan |
|---|---|---|---|
| Type of collateral | Secured via your home | Secured via your home | Unsecured |
| Borrowing limit | Typically up to 85% of home value, minus mortgage | Typically up to 90% or more of your home equity | Typically from $3,000 up to $50,000 or more |
| How funds can be used | For a variety of purposes | For a variety of purposes | Often strictly for home improvement |
| How funds are dispersed | Lump sum | Line of credit | Lump sum |
| How long to receive funds | Typically two weeks to two months | Typically two to six weeks | Often within days |
| Type of interest rate | Typically fixed rate and may be lower than other loans | Typically variable but some lenders offer fixed rate; rates vary | Typically fixed rate; rates vary widely |
| Repayment term | Typically 20 to 30 years | Typically 20 years after the 10-year draw period | Typically 1 to 7 years |
Which Home Improvement Loan Option Is Better?
Now that you’ve learned about the features of these loan options, here’s some guidance on which one is likely to be best for your needs.
When Home Equity Loans Make Sense
Here are some scenarios in which a home equity loan may be a good choice:
• If you have significant home equity and are looking to borrow a large amount, a home equity loan could be the right move to access a lump sum of cash.
• If you want to have a long repayment period, the possibility of a 30-year term could be a good fit.
• When you are seeking to keep costs as low as possible, these loans may offer lower interest rates.
• A home equity loan can be a wise move when you need cash for other purposes, such as debt consolidation or educational expenses.
• Some interest payments may be tax-deductible, depending on how you use the funds, which could be a benefit of this kind of loan.
When HELOCs Make Sense
A HELOC may be your best bet in the following situations:
• You aren’t sure how much money you need and like the flexibility of a line of credit.
• You want to keep your payments as low as possible in the near future. HELOCs can usually be an interest-only loan during the first 10-year draw period of the arrangement.
• A HELOC can be a good fit for people who are doing a renovation in stages, and want to draw funds as needed versus all upfront.
• You need cash for something other than just home renovation, such as to pay down credit card debt or fund tuition.
• Depending on what you put the money toward, interest payments may be tax-deductible to a degree.
When Home Improvement Personal Loans Make Sense
Consider these upsides:
• These personal loans tend to have a straightforward, fast application process, and often have fewer fees, such as no origination fees.
• Home improvement loans are usually approved more quickly than other kinds of home loans.
• These loans can be a good way to borrow a small sum, such as $3,000 or $5,000 for a project you need to complete quickly (say, a bathroom without a functional shower).
• Home improvement loans can be a good option for new homeowners, who haven’t yet built up much equity in their home but need funds for renovation.
• For those who are uncomfortable using their home as collateral, this kind of loan can be a smart move.
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The Takeaway
Home improvement is a popular pursuit and can not only make daily life more enjoyable, it can also boost the value of what is likely your biggest asset. If you are ready to take on a renovation (or need to pay off the bills for the reno you already did), you’ll have options in terms of how to access funds.
Depending on your needs and personal situation, you might prefer a home equity loan, a home equity line of credit (HELOC), or a home improvement personal loan. Why not start by looking into a HELOC? A line of credit is a super-flexible way to borrow.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.
FAQ
Can a HELOC only be used for repairs or renovations?
You can use the funds you draw from a home equity line of credit (HELOC) for pretty much anything you can think of. But if you are hoping to take advantage of a tax deduction for the interest you pay on your HELOC, it will need to be used to buy, build, or substantially improve a home.
Is a HELOC a second mortgage?
Yes, if you are still paying off the mortgage on your home, a home equity line of credit (HELOC) that is secured by that property would be considered a second mortgage. The same is true of a home equity loan.
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