Home Improvement Loan vs. Home Equity Loan: Which Is Best for You?

Nearly half of homeowners are planning home improvement projects in 2025, according to a survey from This Old House, and most plan on financing their upgrades. Home improvement loans and home equity loans are well-suited for this task because you can often borrow larger amounts more easily. 

But which is best? In the survey, respondents were split: 17% chose a personal loan for home improvements, while 15% went with a home equity loan. Each has its pros and cons. We’ll help you choose whether a home improvement loan vs. home equity loan is best for your next upgrade.

Table of Contents

1. What is a home improvement loan?
2. What is a home equity loan?
3. Differences at a glance
4. Which should you choose?
   1. You recently bought your home with a small down payment and want to make some changes
   2. You want to build a $67,000 ADU in your backyard for your mom
   3. You need $2,000 to paint your interior walls black
   4. A contractor ruined your kitchen and you need $12,000 to fix it
   5. Your visiting friend ruins your bathroom and spurs an $80,000 major remodel
5. Home improvement loan vs. HELOC
6. Alternatives
7. FAQ

What is a home improvement loan?

Most people use “home improvement loan” to describe an unsecured personal loan you use to pay for home improvements, although you can use them for just about any reason. Personal loans can be better-suited to smaller home renovation projects because they usually come with shorter term lengths and lower loan limits. 

We did a deep dive into the pros and cons of personal loans elsewhere. But for now, here’s what you should know to help you choose whether a home improvement loan or home equity loan is better for your home project:

Pros

• Quick funding

• Few or no fees

• Doesn’t tie up home equity

• No foreclosure risk if you default

Cons

• Higher interest rates

• Interest isn’t tax-deductible

• May not suitable for large renovation projects

What is a home equity loan?

A home equity loan is a secured loan. The collateral is your home. We’ve covered the pros and cons of home equity loans in more detail, which you should know before going down this path. But in comparison with personal loans, here’s a quick recap: 

Pros

• Lower interest rates

• Longer term lengths

• Larger loan amounts

• Interest may be tax-deductible

Cons

• Slow funding timelines

• Foreclosure risk if you default

• Requires significant home equity

• You might pay loan fees and/or closing costs

Home equity loan vs. home improvement loan at a glance

Figure and SoFi are our highest-rated home equity loan and personal loan lenders, respectively.

Note that while Figure describes its product as a home equity line of credit (HELOC), it operates more like a home equity loan because you borrow the full amount upfront and repay it at a fixed rate. The difference is that you can reborrow from your Figure line of credit as you pay it down.

	4.9 Visit Site	5.0 Visit Site
Rates (APR)	6.35% – 10.85% fixed	8.99% – 29.99% fixed (w/ all discounts)
Rates (APR)	Rates (APR)
6.35% – 10.85% fixed	8.99% – 29.99% fixed (w/ all discounts)
Term lengths	5, 10, 15, or 30 years	1 – 7 years
Term lengths	Term lengths
5, 10, 15, or 30 years	1 – 7 years
Loan amounts	$15,000 – $400,000	$5,000 – $100,000
Loan amounts	Loan amounts
$15,000 – $400,000	$5,000 – $100,000
Credit score	640+ (but 720+ is advised)	660+
Credit score	Credit score
640+ (but 720+ is advised)	660+
Secured or unsecured?	Secured (by your home)	Unsecured
Secured or unsecured?	Secured or unsecured?
Secured (by your home)	Unsecured
Tax-deductible interest?	Possibly*	No
Tax-deductible interest?	Tax-deductible interest?
Possibly*	No
Fees	Origination fee (up to 4.99%)	None required
Fees	Fees
Origination fee (up to 4.99%)	None required
	See our full lists of the best home equity loan providers and the best personal loans.

*If funds are used to “buy, build, or substantially improve the residence”

It’s important to plan out the needs and ensure you can afford the payments. Whether you are using a home equity or personal loan, if you can’t afford the payments, don’t move forward with the loan.
If you don’t make the payments on a loan or line of credit tied to your home’s equity, the lender has the right to foreclose on your property to recoup their payments.
However, if you encounter any issues, long before it gets to this stage, I advise working with the lender to restructure the payment to ensure you can pay.

Which should you choose? Home improvement loan or home equity loan?

Seeing the pros and cons of a home improvement loan vs. a home equity loan is helpful, but it doesn’t really capture all the possibilities in everyday life. So we’ve rounded up some examples and explored why you might choose one or the other. 

You recently bought your home with a small down payment and want to make some changes

Why?

• Most home equity loan lenders will lend up to 80% of your home’s value, minus your mortgage.
• Most homebuyers only put 15% down, meaning they may not even qualify for a home equity loan. 

You—and your lender—don’t want to end up owing more on your home than it’s worth, which is a real possibility if home values go down. So they generally limit you to a loan-to-value ratio (LTV) of 80%, which gives you a buffer so you don’t end up underwater on your home debts. 

The problem is, for many new homeowners especially, you may not yet have enough equity to meet that threshold. If you only put down 15%, the average, according to a July 2025 Redfin report, your LTV ratio is already at 85%. You’d need to pay down your mortgage more before you’re eligible for financing.

You want to build a $67,000 ADU in your backyard for your mom

Why?

• Finding a personal loan of that size may prove challenging and require high payments. 
• A 10-year personal loan for that amount, with a 16% rate, would cost $67,680 in total interest and require monthly payments of $1,122.
• A 15-year home equity loan for that amount, with an 8.9% rate, would cost $51,600 in total interest and fees and require monthly payments of $640.

So you recently found out about granny flats and want to test your grown-up LEGO skills on a build-your-own tiny home. This is a perfect use case for a home equity loan, simply because of the size of the loan. 

It’s a large amount of money—larger than most personal loan lenders will even offer. And assuming you can find one, the costs will be high. (Although, on the bright side, you may be able to pay off a personal loan sooner. But you can always pay extra toward a lower-rate home equity loan.)

You need $2,000 to paint your interior walls black

Winner: Home improvement loan

Why?

• A three-year, $2,000 personal loan at 12% interest would cost $66 per month, and you’d end up paying $391 in total loan costs. 
• A five-year, $2,000 home equity loan at 7% interest would cost $40 per month. But with a 5% origination fee, your total loan costs work out to $476.

You’ve taken the Rolling Stones song to heart, or you just want to relive your high-school goth days. Either way, painting it black will be cheaper in the long run if you go with a personal loan. Your monthly payments will only be $22 higher, but you’ll be out of debt two years sooner and save $85. 

And no, you can’t deduct the interest for painting your walls black, regardless of which type of debt you use. In order to count, the loan must be secured by your home, and it has to “substantially improve” your home’s value—which, unless you’re selling to a vampire, likely won’t be the case with most buyers. 

A contractor ruined your kitchen and you need $12,000 to fix it

Why?

• A five-year personal loan at a 14% rate would cost $4,753 in total interest and have monthly payments of $279. 
• A 10-year home equity loan at 8% interest could cost $6,071 in total interest and fees, and come with monthly payments of $145.

HELOC vs Home Equity Loan vs Personal Loan?
byu/CoffeeAndCroissant inpersonalfinance

So like the Redditor above, say a contractor unknowingly punched a hole in your kitchen drain pipe long ago, causing all your cabinets to turn into mold farms. Assuming you have the flexibility in your budget to make monthly payments that are $134 higher, a personal loan may be your best option here. 

That’s because your total loan costs will be lower with a personal loan, despite the higher interest rate. You’ll also be free of that debt in half the time. That will let you start saving up a cash emergency fund sooner for disasters like this, so you don’t need to rely on debt in the future. 

Plus, as with your goth wall upgrade, you can’t deduct interest on a home equity loan simply for making home repairs unless you’re getting a significant boost to your home’s value. So you might as well choose the less risky (and cheaper) option if possible. 

Your visiting friend ruins your bathroom and spurs an $80,000 major remodel

Why?

• A 10-year personal loan at a rate of 18% comes with monthly payments of $1,441 and would cost $92,978 in total interest. 
• A 15-year home equity loan with a 10% interest rate comes with monthly payments of $860 and would cost $78,743 in total interest and fees, which may be tax-deductible. 

A few days after your friend leaves, you notice weird moisture spots appearing on your first-floor ceiling, and you can’t unclog your upstairs bathroom. You call a plumber, who finds that your friend flushed something they shouldn’t have, causing your pipes to clog and crack and leading to mold buildup in your walls. 

You’ve been talking about remodeling and expanding your cramped upstairs bathroom with your partner already, and you decide now is the time to do it. Since you’ll be completing the repairs as a part of a high-ROI project anyway, the IRS considers the financing charges a tax-deductible expense if you use a home equity loan. 

And with lower interest rates, it’s a cheaper option, even considering the longer term length and potential closing costs. You’d be hard-pressed to find a lender willing to offer this much for a personal loan. 

Home improvement loan vs. HELOC

A home equity line of credit (HELOC) works differently from a home equity loan. Instead of borrowing a lump sum upfront, you draw funds as needed during what’s known as a draw period, usually five to 10 years. You typically only make interest payments during this time, with your full repayment starting later.

When a HELOC might be better than a home improvement loan:

• You’re doing a project with unpredictable costs (e.g., phased contractor work, DIY upgrades).
• You want lower minimum monthly payments at first.
• You expect to borrow smaller amounts at different times rather than one lump sum.

We generally do not recommend personal loans for home improvement work. If personal loans are used quickly for a short-term need, they may be beneficial. However, if you are doing a home improvement project, you should use your home equity for such projects, considering the benefits laid out above, including potential tax benefits.

When a home improvement loan might be better than a HELOC:

• You want fixed monthly payments and a clear payoff date.
• You don’t want to risk foreclosure by borrowing against your home.
• You only need to borrow a modest amount for a smaller project.

Alternatives

If personal loans, home equity loans, and HELOCs aren’t your thing, you still have many options available:

Home equity agreement

Home equity agreements (HEAs) offer cash in exchange for a share of equity in your home’s future value. It requires no payments and has more lenient credit requirements, but it can be risky because you don’t know how much it will eventually cost.

Cash-out refinance

If you can qualify for lower rates on a home loan than what you’re currently paying, you can accomplish two objectives at once by doing a cash-out refinance. You’ll receive the excess funds in cash.

PACE loans

Homeowners in four states (California, Florida, Missouri, and Ohio) are eligible for Residential Property Assessed Clean Energy loans, more commonly known as PACE loans. You can use them to fund energy-efficient home upgrades. 

PACE loans require no down payment or monthly payments. Instead, you repay the loan through higher property taxes. The debt follows your home, though, which can make it much harder to sell before you repay the loan. 

FAQ

What’s the difference between a home improvement loan and a personal loan?

Nothing. A home improvement loan is a general term for any type of loan used to pay for home improvements, which can include personal loans. 

Is it worth taking out a loan for home improvements?

Yes, it can be. If you’ve checked that you can afford the payments and that it would add to your home value, taking out a personal loan for home improvements is often worth it. 

What’s the monthly payment on a $100,000 home equity loan?

A $100,000 home equity loan with a 15-year term length and an 8% rate would require monthly payments of $956. You’d eventually pay around $72,000 in total interest costs over the life of the loan.