You don’t have to settle for a floor plan that no longer works for your needs. As a homeowner, you have every right to change it up by renovating or building a home addition to accommodate your changing interests or growing household.
However, those additions don’t always come cheap. In fact, the average cost of a home addition runs between $21,000 and $73,000.
If you’re like most homeowners, you probably don’t have that much cash on hand. That means you’ll need to find ways to finance your project. Here are a few easy ways to help you finance a home addition or renovation project.
Take Out a Home Equity Loan
When you pay your mortgage, a portion of that payment goes toward your loan’s principal. The more you pay down your loan’s principal amount, the more equity you build up in your home.
It’s the amount of your mortgage principal that you’ve paid off. Under normal circumstances, you won’t be able to access that value until you sell your home. That’s where home equity loans can help.
Home equity loans allow you to borrow against that equity. When you’re approved for one, you’ll use your house as collateral to secure the loan and receive a lump sum of cash to use toward your home renovation project.
This loan won’t replace your existing mortgage. You’ll have to continue paying your regular mortgage while also making payments on your home equity loan.
Keep in mind that most lenders won’t let you borrow the full amount of equity you’ve built up in the house. Most will only issue loans for 80% of the total equity you have in your home. That means you may need to pay for some of the construction costs out of pocket.
Open a Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, also allows you to borrow against the equity you’ve built in your home. However, unlike home equity loans, HELOCs won’t give you an upfront cash payment.
Instead, you’ll have a line of credit through your lender that works a lot like your credit card. You can use however much money you need up to your HELOC’s limit and will only have to pay interest on the amount of money you use.
If you’re not sure how much your home addition will cost or plan on completing additional renovations a few years later, a HELOC may end up saving you money on interest. Even better, it may increase your credit score, making it easier for you to qualify for loans in the future.
Apply for a Cash-Out Mortgage Refinance
If taking out a second loan or line of credit in addition to your mortgage doesn’t sound like a great idea, a cash-out mortgage refinance is a good option.
When you’re approved for a cash-out refinance, you’ll get rid of your original mortgage loan and replace it with a new, larger mortgage. The refinanced loan will roll your original mortgage’s principal amount over and let you borrow up to 80% of the equity you’ve built in your home.
The biggest benefit of this type of home addition financing is that you’ll only have to make one mortgage payment each month. Further, you may be able to lock in a lower interest rate than you had on your previous mortgage.
If you’re considering a cash-out refinance, speak with your lender and find out what the current interest rate is. If the rate is lower than what you’re paying on an existing mortgage, you may end up saving money in the long run.
Look Into Construction Loans
Construction loans are designed specifically for homeowners building new homes or adding new home additions to their floorplan. These loans typically have shorter repayment terms and tend to have higher interest rates than other financing options.
This is because the loans don’t use your home as collateral. So, if you default on the loan or stop making payments, the bank won’t be able to take your house. This is good news for you, but it makes issuing these loans riskier for the lender.
To qualify for this type of financing, you’ll need to submit a plan for the project, the estimated budget, the timeframe of construction, and any other details the lender requests.
Unlike other loan options, construction loans issue payments throughout the construction timeline. You’ll receive periodic payments that you can use to pay your contractor and cover the cost of materials for each major step of the project.
Until the project is complete, you’ll usually only have to make interest payments on the loan. Once the project wraps up, lenders will expect monthly payments for both the interest earned on the loan and the loan principal.
Use a Personal Loan
To use home equity loans, HELOCs, or cash-out refinances, you must have equity in the house. However, if you just bought the home, you may not have enough equity built up to cover the cost of your addition.
That’s where personal loans can help. These loans are typically smaller and can have higher interest rates than other financing options. However, they’re often easier to qualify for and can help borrowers with less-than-ideal credit scores get the money they need.
If you’re considering using a personal loan for a home renovation project, take your time to shop around. Get quotes from several lenders and see which one will give you the largest loan amount at the lowest interest rate.
Financing Your Home Addition Is Doable
If you’re thinking of building a home addition or want to make extensive changes to your existing floorplan, these financing options will make paying for the project possible. Just remember that choosing the right loan is only one step in the process.
You still need to choose an experienced contractor that you can trust to bring your vision to life. Contact us today to schedule a consultation with our team and see just how easy it is to turn your house into your dream home.