44% of Homeowners Plan to Renovate This Year. Here's How to Finance Your Next Project

Here are some borrowing options to look at if there's a big renovation on the horizon.

Renovating your home is a great way to make your living space more comfortable. You might also end up adding resale value to your home in the course of your renovations.

In a recent LightStream survey, 44% of homeowners said they intend to renovate their properties this year. That's an increase from 2021, when only 39% of homeowners had renovation plans.

But if you don't have a pile of cash sitting around in your savings account for home improvement purposes, you may need to borrow money to swing your renovation. Here are some options to consider.

1. Take out a renovation loan

A renovation loan is a personal loan earmarked for home improvements. The upside of getting a renovation loan is that you may be able to borrow in a relatively affordable fashion. And if you have a great credit score, you might snag a low interest rate on your loan.

Plus, personal loans are unsecured, so they're not tied to a specific asset. If you fall behind on your loan payments, you won't risk losing your home like you would with a home equity loan or line of credit (HELOC).

Now, this isn't to say you shouldn't keep up with your loan payments. Falling behind on any loan obligation could cause severe damage to your credit score and result in other unfavorable consequences. But if you don't like the idea of your home serving as collateral for a loan, then a personal loan may be your best bet.

2. Tap your home equity

These days, U.S. homeowners are sitting on record levels of equity thanks to an increase in home values. Equity refers to the portion of your home you own outright, and it's the difference between your home's market value and your mortgage balance.

There are several ways you can tap your home equity to finance a renovation. First, you can take out a home equity loan, where you borrow a lump sum of money and pay it off over time. You may find that you're able to snag an even lower interest rate on a home equity loan than on a personal loan.

A HELOC is another option worth looking at for a renovation, especially if you're not sure exactly how much the work will end up costing you. With a HELOC, you don't have to tap the entire line of credit you're approved for. If your renovations end up costing less, you can borrow less -- and accrue interest on a smaller sum.

One final option to look at for tapping home equity is a cash-out refinance, which allows you to swap your existing mortgage for a new one with a higher balance than your current balance. That extra cash is money you can then use for any purpose, such as to finance a renovation.

The downside of a cash-out refinance is having to go through the process of taking out a whole new mortgage. But the upside is huge -- the potential for big savings on the sum you borrow. That's because mortgage rates are still sitting at competitive levels right now. If you borrow a sum of money via a cash-out refinance to renovate, you might pay less interest than you would with any of the aforementioned choices.

What's the right call?

If you're looking to renovate this year, you have options -- especially if you've been in your home for a while and have built a fair amount of equity in it. Do some research so you're able to land on the most affordable way to borrow.