You want to remodel your house, but you don’t have the money for the upfront expenses. If you don’t have a lot of equity in your house, you can still fund the project with a construction loan, but is it the best option? Not always.
Continue reading to find out more about construction loans, why they’re not always the best option for a remodel, and why there might be a better fit for you.
A complete guide to help you understand the different ways you can finance your home addition and walk you through the pros and cons of each.
A thorough guide to financing, budgeting, and maximizing the value of your renovation project to add on to your home
The advantages of increasing your current square footage are numerous. However, to be completely honest, nothing is more difficult or costly to complete around the house than adding an addition. And for that reason, selecting the best financing option is a crucial choice.
We have therefore developed this thorough guide to assist you in determining which home addition financing option is best for your project by guiding you through all of the available loan options.
You’ve come to the right place if you’re prepared to expand the size of your home but aren’t sure how to finance the addition.
You can add the extra square footage your property is currently lacking and significantly increase its value by building onto an existing space to create your ideal home.
Nevertheless, the expense of an addition clearly represents a significant financial commitment, so selecting the appropriate financing option is a crucial choice.
We’re the first to admit that there are many options for financing your project that a quick search will undoubtedly turn up, and it can be confusing to sort through them all.
This post walks you through all of the available financing options, including RenoFi Loans, conventional home equity loans, personal loans, construction loans, and more, so you can decide which is the best course of action for getting the money you need.
But keep in mind that just because you can finance an addition with a particular kind of loan, doesn’t mean that’s the best option for you. Additionally, we’ll weigh the advantages and disadvantages of six options to assist you in choosing the best course of action.
Just keep in mind that choosing the incorrect option may result in higher monthly payments, a reduction in your borrowing capacity, or both.
Here’s what you’ll learn and everything that we’ll explore:
House Additions: Costs, Financing, and Expert Advice
By increasing the amount of livable square footage in your home, remodeling your current space to create your ideal home can also significantly raise its value. Whether it’s to make room for your expanding family or change with your needs, an addition can provide a fantastic return on investment in terms of both money and functionality.
But knowing how to finance an addition can be tricky. A brief search will definitely turn up a number of options for financing your project, and we understand that it can be difficult to understand how they differ from one another. Additionally, selecting the incorrect option may result in higher monthly payments and reduced borrowing capacity.
We’ll walk you through each of the available financing options, including a RenoFi Loan, a personal loan, a construction loan, a traditional home equity loan, and more. We’ll also discuss how to finance a home addition without equity for first-time homeowners, enabling you to choose the best course of action for obtaining the financing required to pay for your home improvement.
Types of House Additions
Any project that expands a home’s overall living space, whether vertically or horizontally, is called an addition. They are available in a variety of forms, sizes, prices, and uses, all of which will surely be taken into consideration when choosing the best financing option for your home addition.
According to HomeAdvisor, the average cost to build an addition or adding a room to your home is $46,343, with most projects coming in between $20,864 and $72,244 depending on the scope and specifications.
Three of the most typical kinds of house additions are listed below:
The most typical of home additions are full or traditional. These are new additions to the property that increase the square footage. These also take the longest to finish and typically cost the most, depending on the scope of the work. Projects of this kind also include additions to garages and sunrooms.
Micro additions, sometimes referred to as bump-out additions, extend from existing rooms rather than building a completely new space. Therefore, for people who don’t feel like they need as much extra space, they offer a simpler and less expensive option.
If you are unable to build outward, adding a second story might be the best option for expanding your living area. Maybe the lot on which your house is built isn’t large enough, or maybe you don’t want to give up your backyard. It’s also important to remember that expanding is frequently less expensive than building up.
Building vertically can frequently offer the best option for adding more bathrooms, bedrooms, or even a master suite.
Building a single room structure onto the side of the house is a very common type of home addition, whether it’s an in-law suite or a new home office. Usually, these additions are made for a single purpose, such as a hobby room, bathroom, or bedroom.
A second-story addition can help homeowners greatly increase their living space without increasing the footprint of their property when land is at a premium. These additions can greatly increase a home’s resale value and frequently double the amount of floor space (unless they are only partial additions). However, these additions are also very large-scale projects, usually requiring homeowners to relocate while the work is being done.
Bump outs improve a room’s layout; for example, they can enlarge a basement to provide more storage or extend a kitchen to add an eat-in area. Your master bathroom might only need an extra 50 square feet to accommodate a walk-in shower. These additions are usually less costly because they are usually smaller.
Sunroom or Conservatory Additions
Typically, a sunroom is an additional living area that is set apart from the main house. With their open layouts and frequent use of prefabricated materials, these areas are highly adaptable and perfect for lounging or indoor gardening.
A one- or two-vehicle attached garage can be converted into a finished, useful living area with a garage conversion. This is accomplished by putting in flooring, a ceiling, and installation, as well as by swapping out the garage door for a solid wall. Although these rooms are frequently used for in-law suites, they make excellent rental spaces because they have a separate entrance.
Things To Considerations With House Additions
Make sure you’ve thought of everything before committing to any decisions about your home addition. Thus, there are a few things you should be aware of while you’re busy making your wish list and looking into your loan options.
Obtaining Permits. For home addition projects, each city and state will need its own permits, with different requirements and procedures for obtaining them. Even though your contractor will probably take care of that step for you, it’s helpful to know what you require in terms of safeguards. Since you will also be paying for them, having more knowledge will help you create a more effective budget.
Working with Architects/Designers. Using a professional designer or architect is not necessary when building an addition, but there are some significant advantages. A designer can assist you in creating a cohesive transition between your old and new space and can provide cost-effective and aesthetically pleasing material options. An architect can guide you in making important decisions about how to maximize the use of your new space and add value in ways you may not have thought of.
Coordinating with Contractors. For your working relationship to be effective, you and your contractor must be in agreement. Each contractor will have a unique communication style, so be sure it aligns with your requirements. Find out in advance who will be your daily point of contact and what the project’s milestones are. Make sure everything is specified in your contract precisely so there won’t be any confusion later on.
Structural feasibility. Speak with your contractor (or two or three) and ask them to visit your space for an inspection. Verify if the plans you have for your addition are truly feasible, and if so, what kind of work and expense you’re looking at. Certain areas without plumbing or electricity or certain bearing walls that are in place might need the work of additional specialized subcontractors.
Functional and design considerations. Investigate various designs with a professional to understand your options and what’s feasible, and conduct your own online research to find what you like. Strive to maintain your current home’s style and decor as much as possible to make the area feel more cohesive. Even though you want the addition to fulfill your needs, coherence is crucial to a seamless design that enhances the rooms in your house that you already adore.
3 Reasons Why A Home Addition Is A Great Idea
Even though your family may have outgrown your house, you still want to stay put.
It’s possible that you’ve been promising yourself that ideal kitchen for some time. Maybe as your kids get older and become young adults, you want to make the room that everyone in your family needs.
While there are many reasons why someone would want to add on to their house, what are the main advantages of doing so?
1. Extra Living Space
The desire for additional living space that can be customized to one’s needs is one of the most popular reasons for home additions. Not surprisingly, the top renovation goal for homeowners is to increase square footage.
2. Stay In The Neighborhood You Love
Not only can a home addition be cheaper and easier than moving, but perhaps you worry that finding another property in your desired area might be challenging given the housing stock shortage that we find ourselves in the midst of right now. Adding extra space to your existing property saves the disruption of uprooting from friends, neighbors, schools, and the amenities you currently enjoy in your current location.
3. Increase Your Home’s Value
An addition to your house will usually require a financial investment that raises the property’s overall value, though this is not always the case. Even if you do not intend to move for some time, a striking addition will improve curb appeal in the event that you decide to sell in the future.
Home Addition Costs in 2023
So how much does a home addition cost? According to HomeAdvisor, the average cost of a home addition or adding a room to your home is $46,343, with most projects coming in between $22,215 and $81,369 depending on the scope and specifications.
- Home office: $18,000 to $35,000. It needs to be at least 70 square feet, have a window, and a closet if you want it to double as an extra bedroom.
- Master bedroom: $25,000 to $100,000
- Bathroom: $20,000 to $60,000. Even though adding this room is among the most expensive, it can increase the room’s resale value by more than 200%.
- Kitchen: Average of approx. $65,000. Gourmet kitchens with high-end appliances can reach $125,000+.
- Second story: $100 to $500 per square foot, more so in the event that the roof needs to be replaced
You will have a variety of options to choose from when figuring out how to pay for a home addition, but each has pros and cons of its own. Thus, it’s critical to have access to all available information and comprehend the distinctions.
Making the Best Decision for Your Home Additions
You want to finance your home addition as wisely as possible, regardless of its size and scope. The significance of taking the time to thoroughly comprehend the various options that are available to you and to be aware of the advantages and disadvantages of each cannot be emphasized enough. And this means asking yourself the following questions:
- How much is your addition going to cost?
- How much equity do you have in your home?
- What’s your credit score and credit history?
- Do you owe money on any additional credit cards or loans?
- What is the maximum monthly payment you can afford?
- How long do you want to repay the loan over?
When you have the answers, contact RenoFi for next steps. If you’re not sure if one of our renovation loans is right for you, we can help. In order to give you peace of mind that you’re getting the best quality at the best prices, we can also put you in touch with nearby lenders and contractors through our vast network.
Use our fantastic monthly payment calculator to see instantaneously how RenoFi loans expand your borrowing capacity and what those rates might be. And to learn more wise advice and details on maximizing the return on investment from your new home additions, get in touch with RenoFi right now.
The different financing options that are available are listed below, along with the key characteristics of each.
6 Ways To Finance A Home Addition
There are several options that you will have to choose from, and each has pros and cons of its own.
Spend some time learning about the distinctions between these six methods of financing your addition, then carefully assess which option will enable you to borrow the entire amount you require at the lowest possible monthly payment.
RenoFi Loans are a brand-new category of home improvement loans that offer the ideal means of extending your borrowing capacity and financing a house addition. RenoFi Loans increase your borrowing power by 11 times because, in contrast to traditional home equity loans, they take into account the value of your house after the work is finished. This is demonstrated in the example below:
Because of this, a RenoFi Loan is an excellent choice for recent homeowners who are eager to begin the addition but lack the tappable equity to obtain a home equity loan or home equity line of credit.
Given that one of the primary advantages of building a home addition is typically raising the value of your property, this will give you more money to design the home of your dreams without forcing you to make needless compromises or narrow the scope of your project.
What is the maximum amount you could borrow with a RenoFi Loan?
Assume that the current value of your home is $500,000 and that your mortgage is $350,000. Typically, a home equity loan allows you to borrow up to $50,000. However, the planned addition to your house will deduct up to $750,000 from the project’s final value.
In this case, a RenoFi Loan could allow you to borrow up to $350,000. That’s a huge increase in your borrowing power.
A RenoFi Loan lets you benefit from lower market rates in comparison to many of the alternatives’ higher interest rates, with terms up to 20 years and your loan based on the after renovation value.
You’ll be happy to learn that refinancing is not necessary if your first mortgage already has a competitive rate locked in. You can maintain your low rates and avoid having to restart your mortgage because this second mortgage is ideal for the kind of project you’re working on.
Simply put, a RenoFi Loan provides the most money and the lowest monthly payment for the majority of homeowners. Unlike some of the alternatives, there are no drawbacks, inspections, or contractor involvement to worry about.
This is how these loans compare to a few other options you may be thinking about:
| Renovation Home Equity Loan | Single-Close Construction To Permanent Loan (CTP) | Fannie Mae HomeStyle Loan | FHA 203k (Full) | Two-Close Construction To Permanent Loan (CTP) | Freddie Mac Choice Renovation Loan | VA Renovation Loan | |
|---|---|---|---|---|---|---|---|
| Is this a mortgage? | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| 1st or 2nd mortgage? | 2nd | 1st | 1st | 1st | 1st | 1st | 1st |
| Require refinance of existing mortgage? | No | Yes | Yes | Yes | Yes | Yes | Yes |
| Typical Interest Rate | Market | Above Market | Above Market | Above Market | Above Market | Above Market | Market |
| Loan Limit (Renovation Cost + Mortgage) | $500,000 | Jumbos allowed | Conforming only | Conforming only | Jumbos allowed | Conforming only | Conforming only |
| Loan Term (max) | 20 years | 30 years | 30 years | 30 years | 30 years | 30 years | 30 years |
| Credit Score Required | 630+ | 700+ | 620+ | 580+ | 580+ | 660+ | 620+ |
| Loan to Value | Up to 90% | Up to 95% | Up to 95% | Up to 96.5% | Up to 80% | Up to 95% | Up to 95% (90% if refinancing) |
| Can be used for building new home? | No | Yes | No | No | Yes | No | No |
| Restrictions on type of improvements? | No | No | No | Yes | No | No | Yes |
Here are the need-to-know details:
- Loan amounts from $20k to $500k
- Low fixed interest rates like traditional home equity loans
- Repayment terms up to 20 years
- Possibility of borrowing up to 90% of the value after renovation
- The full loan amount available at closing
Why not talk to one of our advisors to see if this kind of loan is right for you, or use the RenoFi Loan Calculator to see how much you could borrow?
The most money and lowest monthly payment for your renovation
Make a loan up to 90% of the value of your future home with a RenoFi Renovation Loan.
A Home Equity Loan or Line of Credit (HELOC)
With the help of a home equity loan or line of credit (HELOC), you can access any equity you’ve already built up by paying off your mortgage, releasing a lump amount that you can use to finance your addition.
By simply subtracting your mortgage payment from the current value of your home, you can quickly determine how much equity you have. There is $200k equity in a $600k property with a $400k mortgage balance.
You must realize, however, that a standard home equity loan will only let you borrow up to 80% of the home’s value. This means that, for example, if your property is currently valued at $500k and your outstanding mortgage balance is $350k, the maximum amount you will be able to borrow is $50k.
However, there is a major drawback to these loans for a lot of homeowners, and that is that if you haven’t owned your house for a long time, you might not have built up much equity.
Just check out how long it can take to accumulate $100,000 in equity:
Financing a home addition can be very expensive and frequently requires a sizable cash infusion. As a result, it is not a viable option for people who have just recently purchased their property and do not yet have enough tappable equity.
Furthermore, even those with equity available will find that a RenoFi Loan, for example, maximizes their borrowing power and relieves them of any obligation to scale back on their project’s scope because they know there’s a way to borrow all the money required at the best rate.
Many homeowners don’t want to forgo the years it may take to accumulate sufficient equity or, more frequently than not, have to make concessions regarding the extent of the renovations. This is unfair, in our opinion, which is one of the reasons RenoFi was introduced.
For homeowners who have been in their house for a long time, a home equity loan or home equity line of credit may be a good source of funding for certain smaller projects, but for the majority, they’re limiting options.
A cash-out refinance involves refinancing your mortgage. You can use the extra funds to finance your home addition project by refinancing your current mortgage with a larger loan.
However, the drawback of this financing option for a home addition is that it necessitates a substantial amount of equity built up in your property. Equity that many homeowners haven’t built up.
Having said that, even if this is the case and you have been a homeowner for a long time, the amount that can be released with a cash-out refinance is frequently capped by lenders at 80% of your home’s current value, once more providing significantly less borrowing power than a RenoFi loan.
Although they were first designed to finance the construction of new homes, construction loans are also a common way to pay for significant home improvements. Construction loans combine a traditional mortgage with an additional loan to fund improvements. They are based on the future value of your home following the proposed renovation or construction project.
In our opinion, there are three main reasons why you shouldn’t finance any renovations—including an addition—with a construction loan. The first of these is that you are compelled to refinance your house, frequently at a rate that is significantly higher than your existing one, and you may have to pay higher monthly payments as a result.
Secondly, because you have to refinance for this kind of loan, your closing costs will be higher because they will take into account both the budget for your home addition and the new value of your mortgage, rather than just the renovations alone.
As if that weren’t enough, construction loans typically have higher lender fees than any other kind of loan, not to mention the difficult draw procedure you’ll have to go through.
An FHA 203k or Fannie Mae HomeStyle Loan
Potential homebuyers who wish to finance the cost of purchasing a new home while also freeing up cash for improvements frequently use the very comparable government-sponsored FHA 203k or Fannie Mae Homestyle loans. Additionally, you can use them to refinance an existing home and include the costs of renovations in your mortgage.
Similar to a RenoFi Loan, these loans allow you to borrow against the estimated value of your house after construction is complete, which increases your borrowing power. However, the difficulties involved in applying for one of these loans could make your head spin and turn off a lot of people.
The process is far from straightforward. Given their lower credit score requirement than other options, FHA 203k and Fannie Mae HomeStyle loans are sometimes the only financing option available to someone with a poor credit history who is looking to borrow based on the value of their home after renovations. However, the qualifying requirements are extensive, and the application process can be time-consuming and complex.
For more information, see our comparison of Fannie Mae HomeStyle and FHA 203k loans.
A Personal Loan / Home Improvement Loan
It’s likely that you’ve heard about home improvement loans and seen them touted as an excellent means of funding an addition. However, you may not be aware that these are frequently unsecured personal loans targeted at people seeking financing for home renovation projects.
Due to two factors—limited borrowing capacity and high interest rates—neither personal loans nor home improvement loans—or credit cards, which are occasionally utilized to fund smaller home improvement projects—will be the best options for most homeowners to finance an addition.
Naturally, a higher interest rate translates into higher monthly payments, but it’s important to remember that these can frequently range from 8% to 2015%. On credit cards, this will usually be even higher.
In comparison to other loan options, a personal loan will usually have much shorter repayment terms, which will result in higher monthly payments.
However, even though they aren’t the greatest financing option for most homeowners wishing to finance an addition, personal loans can be alluring for less expensive projects that other options wouldn’t be appropriate due to the quick and easy application process and ease of obtaining them.
What’s The Best Way To Finance An Addition?
Given that a RenoFi Loan combines all the best features of other loans available, we think that, for the majority of homeowners at least, this is the most appealing way to finance a home addition.
They are the only financing option for home additions that offers each of the following advantages:
- A loan based on the after renovation value
- The ability to borrow up to 90% of the value of your home after renovation
- No refinancing required
- No inspections and draws needed
You shouldn’t have to scale back your project’s scope just because you don’t have enough tappable equity to qualify for a home equity loan or line of credit. And with other options available, you don’t have to.
However, we cannot emphasize enough how crucial it is that you take the time to thoroughly comprehend the various financing options that are open to you and to be aware of the advantages and disadvantages of each.
And in order to decide which path to take, you need to ask yourself the following questions:
- How much is your addition going to cost?
- How much equity do you have in your home?
- What’s your credit score and credit history?
- Do you owe money on any additional credit cards or loans?
- What is the maximum monthly payment you can afford?
- How long do you want to repay the loan over?
Home Addition Financing FAQs
Answers to some of the most frequently asked questions by homeowners as they weigh their options for addition financing are provided below.
What type of loan is best for a home addition?
With a RenoFi Loan, you can borrow up to the value of your house after the addition is finished, so you can take advantage of the same low rates as home equity loans and credit lines while maximizing your borrowing power.
This is a well-liked choice that spares you from having to refinance your first mortgage and doesn’t involve the same difficult draw and inspection procedure as alternatives.
How can I finance a home addition without equity?A RenoFi Loan is the perfect way to finance a home addition without equity, allowing you to borrow based on your home’s after renovation value. This makes it perfect for newer homeowners who have not built up equity and who do not want to borrow on a high interest personal loan.
You can include the cost of your addition or renovation into your mortgage with options like FHA 203k Loans and Fannie Mae HomeStyle Loans, just like you can with a cash-out refinance, but these aren’t your only options.
Since they lack the available equity to use a home equity loan or line of credit, or because they want to benefit from lower interest rates than personal loans, homeowners frequently think about taking out additional loans against their mortgage to pay for additions or other home improvement projects.
Homeowners searching for alternatives to taking out additional mortgage debt might consider a RenoFi Loan, which offers the same low interest rates as home equity loans but does not require refinancing. You can borrow money based on the value of your property after renovations.
We would be happy to talk with you further about a RenoFi Loan if you would like to take advantage of the lowest interest rates and monthly payments while still leveraging maximum borrowing power.
The most money and lowest monthly payment for your renovation
Make a loan up to 90% of the value of your future home with a RenoFi Renovation Loan.
The most money and lowest monthly payment for your renovation
Make a loan up to 90% of the value of your future home with a RenoFi Renovation Loan.
Are you considering adding a room to your house? Find out about the different kinds of home addition loans, their benefits and drawbacks, and how to use them to finance your project.
These are the top ten projects that homeowners are using RenoFi Loans to finance, according to RenoFi Advisors.
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FAQ
What is the best loan for an addition?
Home equity line of credit (HELOC): If you’re not sure how much you’ll need to pay for an addition to your home, a HELOC might be a better option. Although fixed-rate options may be available from some lenders, HELOC rates are typically variable. Although the maximum loan amount varies, most lenders permit you to borrow up to 85% of your equity.
Can you add a construction loan to your mortgage?
Major renovation costs are financed through the mortgage rather than after closing when using renovation construction loans. The value of the house after the renovations are finished determines the loan amount. If you are purchasing a fixer-upper but lack the funds for the necessary renovations and repairs, these loans make sense.
What credit score do you need for a construction loan?
A minimum 500 credit score is required for FHA construction loans, but this flexibility comes with a 2010 down payment requirement. However, if your score is 580 or higher, you can get away with just submitting three. 5%.
Read More :
https://www.renofi.com/learn/how-to-finance-a-home-addition/