Data Shows Homeowners Have Big Renovation Plans. Here's How to Finance Them

Looking to improve your home? Here are some options to pay for that work.

Over the past year, a lot of people have spent more time at home. And some people will now be working from home for the foreseeable future.

That's making homeowners rethink their living spaces. So not surprisingly, a recent LightStream survey found that 47% of respondents are utilizing their homes differently now than they did before the pandemic. That extends to millennials, 80% of whom say that spending more time at home has made them want to upgrade their properties.

If you're interested in improving your home, you may not have the cash on hand to cover your next project in full. Here are a few borrowing options you can look at.

1. Get a home renovation loan

A home renovation loan is a personal loan you take out to improve your property. This type of loan, though, won't necessarily be classified as a renovation loan. Personal loans let you borrow money for any purpose, so if you use the proceeds of yours to improve your living space, so be it.

Personal loan interest rates can be competitive, but these loans are also unsecured, which means they're not backed by a specific asset. As such, if you want to qualify for a low rate, you'll need a strong credit score.

2. Get a home equity loan

The equity in your home is the portion of it you own outright. If your property's market value is $400,000 and your mortgage balance is $300,000, you're left with $100,000 in equity.

That equity is something you can borrow against, and the upside of home equity loans is that their interest rates can be very competitive -- even lower than what a personal loan will charge. Plus, these loans can be fairly easy to qualify for since the homes being borrowed against serve as collateral.

The downside of taking out a home equity loan is that if you fall behind on your payments, you risk losing your home, the same way you'd run that risk by not paying your mortgage. But if you make a point to stick to an amount you can afford to repay, you'll minimize that risk and perhaps enjoy some savings via a lower interest rate on the sum you borrow.

3. Get a home equity line of credit (HELOC)

A HELOC gives you access to a line of credit you can draw from during a preset period of time. Usually, you get five to 10 years to access a HELOC.

Like home equity loans, HELOCs can be fairly easy to qualify for and offer competitive interest rates. They also give you flexibility. You can apply for a $30,000 HELOC, and if your renovation only costs $25,000 in the end, you can leave the remaining $5,000 untapped and not pay interest on it.

The downside of getting a HELOC is that you'll generally be looking at a variable interest rate on the amount you borrow, not a fixed rate like you'll get with a personal or home equity loan. That, in turn, could make repaying that HELOC more expensive over time. And if you fall behind on your payments, you could, in turn, risk losing your home.

Which option is best for you?

Home renovations can cost a lot of money, but they have the ability to offer great value. Not only might improving your home allow you to sell it at a higher price once you're ready to do so, but it could also improve your quality of life while you're living there. It pays to explore your options for financing your next renovation. A little research could result in a nice amount of savings.