How Do Home Improvement Loans Work? A Guide to Your Options

A home improvement loan provides you with funds for repairs, renovations, or upgrades to your property. Depending on the type of loan, you may receive the funds in a lump sum or borrow against a revolving line of credit.

With a lump-sum home improvement loan, you typically begin repaying the full amount quickly after the funds are disbursed. These loans often come with fixed interest rates, which make your monthly payments more predictable for budgeting. However, some lump-sum loans have variable rates, meaning your payments and total costs can vary.

Revolving credit lines for home projects offer flexibility since you can draw funds from the available credit line over a specified period. This can help prevent overborrowing since you only take what you need, and you might make interest-only payments during the draw period. However, these loans often have varying payment amounts and interest rates.

Unsecured vs. secured home improvement loans

Home improvement loans can be unsecured, like personal loans, meaning they don’t require pledging your home as collateral. These are usually lump-sum loans with fixed interest rates, predictable payments, and funding times within days.

Many other home improvement loans are secured and require using your home as collateral. These include home equity loans, HELOCs, and cash-out refinance loans. These can be either lump-sum loans or revolving credit lines, and they tend to have lower interest rates because the lender faces less risk. However, funding can take a long time, and you risk losing your home if you default.

Here’s a quick recap of these options:

There are several secured and unsecured options for your home improvement project. As you consider the types below, remember that the best fit will depend on the project size and phasing, desired funding speed, and your unique situation and preferences.

Personal loans for home improvement

Personal loans for home improvement are unsecured fixed-rate loans that provide you with a lump sum. You can use the funds for doing renovations, building additional dwelling units, and other large projects. Plus, personal loan funds usually allow you to use leftover funds for other goals, like debt consolidation.

Depending on the lender, you can access $100,000 personal loans for home improvement projects, or in some cases, higher amounts. These loans come with several benefits, including fast approval and funding with limited documentation, predictable fixed monthly payments, no collateral requirement, and no impact on your home equity. BHG specializes in larger loans such as these, up to $250,000.¹

However, annual percentage rates (APRs) may be higher than secured options, and loan amounts depend on your credit and income situation. Loan terms tend to be shorter than home equity-backed loan terms, which can impact payment affordability. BHG Financial offers long personal loan terms of up to 10 years.^1,2

Home equity loans

A home equity loan is a fixed-rate, lump-sum loan secured by your property, based on its market value minus the mortgage balance. For example, if your home has a market value of $500,000 and you still owe your lender $200,000, you have $300,000 in home equity.

Lenders typically allow borrowing up to about 80%–85% of your appraised value minus your outstanding mortgage ($240,000 to $255,000 in the above example). This makes home equity loans suitable for covering high-cost home additions and other major upgrades with a defined budget, provided you’ve built substantial equity to qualify.

Most home equity loans have fixed rates and long terms of up to 30 years, which is great if you’d like lower, predictable monthly payments. And, because these loans are collateralized, qualified borrowers may see lower interest rates than with comparable unsecured options.

The major tradeoff is that home equity loans have risks. Since you must use your home as collateral, missed payments can lead to foreclosure, and the borrowed amount reduces your home’s equity until it’s paid off.

Additionally, these loans have extensive application processes with strict requirements, such as a credit score above 620, a maximum debt-to-income ratio of around 45%, and a satisfactory appraisal. You’ll also typically pay closing costs, which can amount to 2% to 6% of the loan amount.

Home equity line of credit (HELOC)

A HELOC is a revolving credit line secured by your home equity. You draw funds as needed during the draw period—often with interest-only payments—then repay principal and interest during the repayment term. This makes HELOCs more suitable for ongoing home improvement projects without a clear budget and for situations where your cash flow can only support smaller initial payments.

According to the Federal Trade Commission, HELOCs tend to have variable interest rates, which add unpredictability to your total costs. They can also have slightly shorter terms than home equity loans, which may affect long-term payment affordability.

However, they have similar borrowing requirements, including at least 15%–20% in home equity, a credit score around 620 or higher, and a maximum DTI ratio of near 45%. Plus, they require a similar thorough application process that can take up to six weeks and come with the same closing costs and home-related risks.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new, larger loan and pays you the difference in cash. This type of secured loan can be useful for major remodels or for adjusting your mortgage to secure a lower interest rate or change your loan term. Additionally, they come in fixed- and variable-rate options to suit your needs.

Choosing a cash-out refinance generally makes sense if you have substantial equity (often 20%+ after closing) and the rate or term changes leave you with a net benefit. It can also make sense if you’d like to avoid managing multiple loans associated with your home.

However, expect standard closing costs and a full mortgage underwriting process that requires meeting credit score, DTI ratio, and other requirements. The entire process can mean waiting several weeks to receive your funds. Also, your home will still be at risk since the cash-out refinance loan is replacing your current mortgage.

Renovation mortgages and government-backed loans

Renovation mortgages, like FHA 203(k) loans and Fannie Mae HomeStyle, wrap your home purchase and renovation into a single loan. This makes them popular for fixer-uppers or comprehensive rehabs. However, planned improvements must meet the program’s rules, and these loans usually take a phased approach to funding.

Depending on the program, you can put as little as 3.5% down with a 580+ credit score, making renovation mortgages ideal if you have little cash on hand or need to work on your credit score. Plus, some products allow generous loan amounts up to 110% of the property’s after-renovation value.

While these loans involve more documentation and contractor oversight than several other home improvement loans, they can be cost-effective for major projects. However, you’ll also need to budget for closing costs.

High-income professionals often prioritize quick, predictable financing without risking their home, yet may find equity options appealing for large budgets if timelines allow. Whichever group you fall into, weigh your options with the factors below in mind.

Interest rates and loan terms

Unsecured loans generally have higher rates than secured loans because you’re not pledging collateral. Secured options typically offer lower rates but involve putting your property at risk and completing more steps. Consider how comfortable you are with this extra risk and effort to get a potentially lower rate than with an unsecured option.

Also, consider that longer terms reduce your monthly payments but increase your total interest paid. Ultimately, you should find a term that results in a payment that works with your budget but doesn’t lead to excessive interest costs.

Here’s a look at how rates and terms vary across loan types:

Collateral requirements

Collateral is an asset you pledge to the lender. Home equity loans, HELOCs, and cash-out refinances use your property as collateral, which can lead to foreclosure if you default.

Personal loans avoid property liens and collateral risk. However, they may have higher APRs and, in some cases, lower maximum loan amounts than home equity products.

Funding speed and flexibility

Personal loans and specialized home improvement loans can provide you with funds in as little as days. On the other hand, equity-backed products typically take weeks due to appraisals, title work, and underwriting.

Here are some ideal scenarios for each loan option we’ve discussed:

• Personal loans: These flexible loans are best for situations where you prefer not to use your home as collateral. Since BHG Financial offers access to personal loan amounts up to $250,000¹, even large renovations are possible.
• HELOCs: Due to the revolving credit line you draw from, a HELOC may be a good choice for multi-phase renovations, additions, or projects with uncertain timing and costs.
• Home equity loans: These may be a good alternative to personal loans for large, one-time expenses with defined bids.
• Cash-out refinances: These can make financial sense for funding major remodels while refinancing your mortgage for a better rate or terms.
• Renovation mortgages: A smart option for purchasing and upgrading a fixer-upper with one loan.

Follow the simple steps below to find the right financing option for your home improvement project and financial profile.

Assess your project size and timeline

To understand your funding needs, define the project’s scope, gather multiple contractor bids, and include a 10% to 20% contingency for surprises.

Evaluate your credit and home equity

Lenders will review your credit score, income, existing debts, and—if the loan is secured—your available equity. These requirements will depend on the specific loan type.

Unsecured loans typically reward your strong credit profile and stable cash flow. On the other hand, equity-based products typically require at least 15% to 20% in home equity, good credit scores, and moderate DTI ratios.

Undergoing personal loan prequalification can help you decide which financing option best suits your project.

Weigh cost versus speed

Personal loans can deliver funds within 24–72 hours for top-tier borrowers, but at higher APRs on average. Equity-backed loans and refinances usually offer lower rates and larger loan amounts but come with longer approval timelines and more steps.

If your timeline is urgent, speed may matter more than the interest rate savings. However, if your project is well-planned and sizable, a lower-cost secured loan might be the better option.

Understand loan terms and repayment

Before choosing any home improvement loan, review these important loan terms:

• Rate and type (fixed vs. variable rate interest)
• Repayment term length
• Origination fees or closing costs
• Prepayment policies
• Disbursement method

When thinking ahead to repayment, note that personal and home equity loans usually have fixed, predictable payments, while HELOCs often allow interest-only draws before you begin full repayment.

After you’ve found the right financing option, compared offers, and chosen a lender with fast decisions and transparent terms, follow the steps below to get a loan and start your home improvement project efficiently. 

Documentation and eligibility

Your lender will ask for several documents that verify important financial and personal information, and if you’re choosing an equity-backed loan, your property details.

Use this checklist to gather the documents you’ll need:

• Proof of identity and residency (driver’s license, Social Security number)
• Proof of income (W-2s/1099s, recent pay stubs, bank statements)
• Recent personal or business tax returns (varies by lender and loan size)
• Documents showing current debts
• Renovation estimates or contracts and project timeline
• Property valuation/appraisal and mortgage statements (for equity/cash-out options)

Understanding the application process

Typical phases to expect during the home improvement loan application process include:

1. Pre-qualification (soft credit check and estimated terms)
2. Full loan application
3. Underwriting (income/asset verification and, for secured loans, appraisal/title)
4. Final loan approval
5. Closing and funding 

Many lenders—including BHG Financial—offer streamlined application processes, quick decisions, and minimal documentation for well-qualified applicants. Unsecured personal loans can close in days; home equity and renovation mortgages may take several weeks.

Managing loan disbursement and repayment

Depending on the loan, your funds may be released in different ways after final approval:

• Lump-sum loan principal is disbursed at closing (personal loans, home equity loans, cash-out refinances)
• Staged draws are tied to project milestones (common with renovation mortgages)
• As-needed draws are made during a HELOC’s draw period

After receiving funds, plan to make on-time loan payments and set up autopay if possible. Also, track any milestone payments and your interest accrual. Remember that paying down your principal faster can reduce your total interest costs and strengthen your credit profile.

Ready to move forward on your renovation without the wait or the need for collateral? BHG Financial offers access to unsecured personal loans and home improvement loans up to $250,000¹ designed for responsible six-figure earners—featuring fixed rates, flexible terms of up to 10 years,^1,2 predictable monthly payments, and a streamlined digital application.

Enjoy concierge-level support from the application through the funding stages, with underwriting that accommodates multiple income streams and complex profiles. Check your rate with no obligation and see how quickly you can finance your project on terms that fit your budget.

Start your application today to explore your options³ and keep your home improvement on schedule.