When you click on the layout tab there is a space that says header, click edit down in the lower right corner. You can either type in a text title, upload a picture you have, or you can upload one from the web. Then it gives you the option to use a picture behind the title and description or to use it instead of the title and description.
What I have done in the past is create a title using fun digiscrap items (see first couple of posts on how to download, and use these elements) and then upload it instead of the title and description. I like to use publisher as my design program (because I can't afford to buy photoshop) but at work I only have PowerPoint to work with.
Here's one of my titles in creation:
Choose a background for the title
Crop background to desired size
Arange letters and elements to your taste.(I change the background after I decided I didn't like it)
Then group all the elements together and right click on the image and save as a picture.
Upload picture to blogger and choose placement as instead of title and description. (Before you upload picture, there will be a box that says shrink to size. Click that to make sure the title fits on the screen...)
Enjoy your new blog title!