Home Equity Loan, HELOC or Personal Loan: Which Is Best for Home Renovations?

Ready to start that kitchen remodel or build the deck you've been dreaming about? Home improvement projects can transform your living space and increase your home's value. But before you start picking out countertops or sketching construction plans, you'll want to figure out the best way to finance your home renovation.

You have 3 main financing options to consider:

• a home equity loan
• a home equity line of credit (HELOC)
• a personal loan

Let’s walk through the key differences between these financing options and look at what to consider when choosing the best fit for your home improvement plans.

Understanding home equity loans, HELOCs and personal loans

A home equity loan, a HELOC and a personal loan can all help fund home renovations, but it’s important to understand how they work so you can decide which option you’ll feel most comfortable with.

Home equity loans (HELs)

A home equity loan works like a mortgage. You borrow a set amount of money and pay it back monthly over time. The loan uses your home's value (subtracting what you still owe from what it's worth) as collateral if you were to default on repaying the loan. These loans are common for funding one-time, large expenses like a major renovation or home addition.

Home equity lines of credit (HELOCs)

A home equity line of credit (HELOC) works more like a credit card. You can borrow what you need—when you need it—up to your approved credit limit. HELOCs allow homeowners to borrow against the equity in their home while only repaying the amount they actually use. This option offers flexibility to borrow money when expenses come up.

Personal loans

Personal loans give you all the money at once like home equity loans, but you don't need to use your home as backup. Instead, your credit score is key to getting approved.

You can choose either a secured or unsecured personal loan. Secured loans require collateral (your car, home, etc.) while unsecured loans don’t. However, unsecured loans are generally higher-interest options.

Personal loans can be good for smaller home projects or if you'd prefer not to use your home as collateral. They’re also popular for debt consolidation due to their typically lower interest rates.

Here are some key differences between home equity loans, HELOCs and personal loans.

The pros and cons of home equity loans, HELOCs and personal loans

Knowing the advantages and disadvantages of using your home equity to fund renovations can help you make a smart choice about how to access that money. Consider the following pros and cons.

Advantages

Disadvantages

When to choose a home equity loan, HELOC or personal loan for a home renovation project

So, which financing option is right for your upcoming home improvement project? The answer comes down to your specific financial situation. Here's how to determine which choice could work best for you.

When to choose a home equity loan

A home equity loan works best when you know exactly what your project will cost and desire steady payments. It usually has the lowest rates, making it perfect for big, one-time projects. Here are some examples:

• a $40,000 kitchen remodel with firm contractor quotes
• a $35,000 in-law suite with set construction costs
• a $15,000 home HVAC system upgrade

When to choose a HELOC

A HELOC can be useful when you're not sure about your final costs or want to do your project in stages. Being able to borrow money as you go could help you better manage your cash flow. Here are some scenarios:

• You're tackling a whole-house renovation that will unfold over several months.
• You're updating your landscaping in phases as the seasons change.
• You want a credit line available for repairs or improvements over the next few years.

When to choose a personal loan

A personal loan is best suited for those who want fast, simple funding and don't want to use their home as collateral. Rates are typically higher than home equity options, but you can get your money sooner. Here are some examples:

• You want to quickly update your bathroom without tapping into home equity.
• You need to replace your roof soon but haven't built up much equity in your home.
• You're planning a $10,000 deck addition and would prefer a quick, simple loan process.

How to get a loan or line of credit for a home improvement project

Getting approved for financing typically takes a few steps, regardless of which option you choose. Here's what you can expect with each.

Home equity loan and HELOC requirements

The approval processes for home equity loans and HELOCs are similar in that they both use your home as collateral. You’ll need to provide documentation of your income, assets and debts. In addition, many lenders prefer that potential borrowers have a credit score of at least 620, a good credit history, a debt-to-income ratio below 43% and at least 15%-20% equity in your home. The process usually takes 2-6 weeks and includes a home appraisal to confirm your property’s value.

Personal loan requirements

Personal loan lenders typically focus on your credit score, income and existing debts when making approval decisions. Many lenders look for a credit score of at least 660, but requirements vary. You'll also need to provide proof of income and information about your monthly expenses. Most personal loans can be approved within a few days. 

What to know about repaying a loan or line of credit

Taking out a loan or line of credit for home projects is one thing, but paying the money back is another! Understanding the repayment process for each will help you budget with confidence.

Home equity loan repayment

With a home equity loan, you'll pay the same amount each month, including the main loan amount and interest. For example, if you were to borrow $50,000 at 7% interest for 15 years, you could pay about $450 a month. Your monthly payment won't change, which makes budgeting easier. In this scenario, it would also be smart to check if there's a fee for paying off your loan early.

HELOC repayment

HELOCs have 2 phases: the draw period (usually 10 years) and the repayment period (usually 20 years). During the draw period, you might have the choice to pay just the interest on what you've borrowed. Once that ends, you'll pay both the main amount and interest on what's left. 

Interest rates can change, so your monthly payments might go up or down. For example, you might start paying off a $50,000 HELOC at 8% interest with $333 a month just for the interest.

Personal loan repayment

Personal loans come with the same payment each month for 1-5 years. These shorter loans mean higher monthly payments but less interest overall. For instance, a $20,000 personal loan at 11% interest for 5 years would cost about $435 each month. Most personal loans let you pay extra money or pay off the loan early to save on interest.

Financing alternatives to home equity loans, HELOCs and personal loans

If you're not sure about whether to use a home equity loan, HELOC or personal loan—or if your application wasn't approved—you have other options for funding your home improvement project:

• Credit cards: These can be good for small home projects, especially if you can get a card that starts with a 0% interest introductory period. This means if you pay off what you borrow during that time frame, you won’t have to pay any interest. Credit card interest rates are often higher than other financing options, so try to avoid carrying over a large balance.
• Cash-out refinance: With a cash-out refinance, you get a new, bigger mortgage and take the extra money in cash. This might be a good option if current interest rates are lower than your existing rate. Keep in mind that this option starts your mortgage loan over and requires closing costs.
• Savings: It might take longer to save up funds, but paying with money you already have means you won’t add any new debt. Try breaking your project into smaller parts as you save up money. Look for ways to cut costs, such as doing some work yourself or buying materials when they're on sale.

How to choose the right loan option with Navy Federal

Ready to start your home renovation? Understanding your financing choices is an important first step. Take time to compare the costs and benefits of each option to find the best fit for your situation and budget. Navy Federal is here to help you find the best home improvement financing solution.