How to Finance Your Home Addition Project

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Instead of going through the hassle of buying and selling, many homeowners who love their current space turn to home additions when they need more room. A home addition is a great way to add square footage without changing your address. However, it's not as simple as extending floors and raising new walls. Adding an addition to your home is an exciting yet sometimes expensive undertaking.

Options for Financing Your Home Addition
Home additions can cost anywhere from $5,000 to $150,000, with an average price of around $46,000, according to Forbes. For most homeowners, that's a considerable investment. So, how can you cover the costs?

Cash
If possible, paying cash for your home addition project is the most straightforward and ideal option. Homeowners can choose to save for an addition or sell an existing piece of property to access cash. Either way, this method frees you from worrying about lenders and interest rates. Depending on your builder, home addition payments may be due upfront, upon completion, or when project milestones are met.

In short, cash can remove much of the hassle of going through a lender, paying fees, and worrying about interest. However, it's understandable that saving enough cash to cover the full amount of an addition isn't feasible for everyone.

Home Equity Loan
Equity, or how much money you would earn from the sale of your home after any associated debts were paid off, is the basis of a home equity loan. You put your home up as collateral for a home equity loan, borrowing against how much wealth you have built up in your property. Much like a mortgage, you are required to make monthly payments toward the loan until it is paid off. Generally, lenders provide a lump sum at a fixed interest rate. Nevertheless, it's important to understand that your home is collateral. If you are unable to repay the loan, you may face foreclosure.

Home Equity Line of Credit (HELOC)
A home equity line of credit is also based on the equity you have in your home. When you borrow against the equity in your home, again using your house as collateral, the lender gives you access to a revolving line of credit. As you make payments toward the loan, the amount of available credit is replenished, allowing you to pull from it again over a certain period of time. Similar to a credit card, you will only have to pay interest on the amount of credit borrowed. However, their interest rates can fluctuate throughout the loan's duration.

Refinancing
Refinancing may be another feasible option to pay for your home addition. Generally, homeowners refinance their home loan mortgage, changing their existing mortgage's terms and/or interest rate. There is a "cash-out" option in which a new, higher mortgage is taken out, and the homeowner receives the difference in cash. This cash can give you enough funds to cover large expenses, like an addition. Yet, it's not a great option for individuals who plan to move within the next five years or so or those who already have a low-interest mortgage rate.

Construction Loan
Finally, a construction loan is given by a lender based on two appraisals: your home's current value and its likely value after the addition. How much money you can borrow is based on the post-addition amount minus what is still owed on the home. The lender is responsible for paying the contractor at certain milestones during the project, often after their inspector approves that work has been completed. While homeowners can usually borrow more than enough money to cover the costs of an addition, it's important to note that the lender oversees payment to the contractor and controls the money. The loan can be converted into a permanent mortgage when the project is complete. Compared to other financing options, there may be higher interest rates and other fees associated with a construction loan.

The Right Financing for Your Addition, Reno, or Remodel
The best financing for your home project depends on various personal factors. However, once you've secured the funds to complete your project, partnering with the right contractor and construction team can help ensure your new addition adds value, beauty, and space to your home.