How to Finance Your Home Addition

Whether you want to renovate your kitchen, expand your bathroom or add a complete addition for your growing family, remodeling your home is a beneficial step that comes with a cost. While you can improve the value of your property as a result of the changes you make, the upfront investment into an addition or remodel can be a notable consideration for some homeowners.

Depending on your goals and budget, you can use different financing methods to fund your next home project. Between taking out equity in your home or applying for renovation loans, the options are endless. In many cases, investing in improving your home can bring you a high return on investment, so it’s simply about choosing the right financing option for you.

Understanding the best choice for your personal situation and finances takes some research. Learn more about how remodeling your home can benefit you and the best way to finance home improvements below.

Why Should You Remodel Your Home?

Whether you’ve owned your home for years or recently bought one, you probably have endless ideas for improvements. Some may be easy and practical, requiring less effort and costs. Other projects may be extensive and require greater funding to complete.

Assessing the goals of your renovation can help you better understand the best way to finance it. Here are a few reasons why you may want to renovate your home:

1. Added Space and Comfort

Whether you have a large family or need a bit more room to entertain friends, increasing the space of your home with an addition can make it feel more comfortable.

For example, you might add an extension on the back of your house to create a sunroom to have another space to relax or build a new guest bedroom so family and friends can stay with you. Another way to create more space and potentially earn a second income is by building an accessory dwelling unit on your property and renting it out to tenants when you’re not using it.

2. Increased Property Value

In most cases, any addition or renovation to your home will increase its value when you sell it. If you plan to eventually sell your home, it can be a beneficial idea to make certain renovations, so you can list it for a higher price and maximize your return on investment.

Consider renovations like adding a bathroom or finishing your basement to create a space the next owner can enjoy. Note that more specific, personalized renovations might not increase your home’s value as much as you might expect. If you’re updating your home specifically because you want to sell it, stick with more general renovations that will appeal to the majority of homebuyers.

3. Improved Energy Efficiency

If your house isn’t already set up for maximum energy efficiency, you could make renovations to reduce your energy use. There are numerous ways to cut costs and save on energy, whether for your entire house or the add-on you plan to build.

For example, you may invest in new windows, install sustainable flooring or replace an outdated heating and cooling system with a greener alternative to create a more energy-efficient household. Many eco-friendly remodeling techniques can help you improve your home’s value, too.

Types of Home Additions

Depending on the vision you have for your home, you may choose one type of addition over another. While some additions involve building entire rooms onto your home, others are less involved and can still add value to your property. The scale of your project will impact how much money you’ll need to pay for it, so it’s important to have a detailed idea of what you want out of your remodel.

Consider the following home addition options to see how they might align with your project goals and budget.

1. Conventional Addition

Also known as a full or traditional addition, a conventional addition is the most common type of addition. It allows you to create a new living space as an extension of your home. An attached garage or sunroom are examples of a conventional addition. The cost can vary depending on what kind of room you plan to add to your home.

2. Bump-Out Addition

A bump-out or micro addition is a small-scale project, often involving renovating an existing room to extend your space. For example, you might “bump out” your kitchen to include a walk-in pantry. These additions tend to be more cost-effective than other additions, as they’re smaller in scale.

3. Second- or Third-Story Addition

If you want to build an addition but don’t have much yard space, building upward can be a beneficial alternative to get the extra space you need. A second- or third-story addition can give you total freedom in adding more bedrooms, building a separate entertainment space or creating another attached space that meets your needs.

Home Addition Financing Options

With your project goals in mind, you can begin exploring funding options for your project. Sometimes, you want to complete a renovation but don’t have enough liquid cash to do so, or you want to pursue financing options that make more sense for your budget and situation. Fortunately, you have numerous methods available to you.

Here are several financing options to think about:

Home Equity Loan

Using the equity of your home as collateral for a loan can be a beneficial option. This loan is commonly known as a second mortgage, where you take out a loan against the value of your home and pay it back alongside your mortgage.

The pros of home equity loans include:

• You get a fixed interest rate on monthly repayments.
• You have flexible repayment terms in some cases (five to 30 years, depending on the lender).
• You get a lump sum of money to put toward the renovation.
• You can obtain the loan more easily with a higher credit score.

The cons of home equity loans include:

• Your home is used as collateral.
• You pay higher interest rates over the lifetime of repayment than other financing options.
• You may have to pay fees prior to getting the loan.
• Your credit score will decrease if you don’t pay the loan back properly.

Home Equity Line of Credit

A home equity line of credit (HELOC) has a similar functionality to a credit card. It offers a revolving line of credit that can be used each time you repay it during the draw period.

Some pros of a HELOC are:

• You only pay interest on the borrowed amount.
• Interest rates fluctuate over the five- to 10-year draw period.
• You can only borrow as much as you need.
• The interest you pay may be tax-deductible.

Some cons of a HELOC are:

• Your home is used as collateral.
• You have less home equity available as you borrow.
• The interest rate is unpredictable.
• New homeowners may not have enough equity in their homes to qualify.

Cash-Out Refinance

This option allows you to get cash if you refinance your home. If you opt for the cash-out refinance option, you replace your current mortgage with a higher loan amount, thus gaining access to the cash value of the equity that becomes available.

A few pros of cash-out refinance include:

• Your new interest rate may be lower than your old interest rate.
• You may get a large sum of money to put toward your renovations.
• The interest is tax-deductible if you make improvements to your home.
• The repayment period can be up to 30 years.

The cons of cash-out refinance are:

• Your new interest rate may be higher than your old interest rate.
• You’ll only have access to a maximum of 80% of your available equity.
• New homeowners may not have enough equity in their homes to qualify.
• Restarting the repayment period when you refinance may set you back years on your mortgage repayment.
• It takes longer to access the money you receive when you refinance your home.

Credit Card

Using a credit card to finance your home renovations can be a smart move for many homeowners, depending on the credit cards they use. For example, if you plan to travel in the coming months, you may want to put your renovations on a credit card that maximizes travel benefits. Another idea would be to look for a credit card that offers cash back benefits.

Some pros of credit cards include:

• You typically have 21-30 days to pay your balance before it collects interest.
• You only have to pay a minimum amount back every month.
• You have immediate access to funds.
• You can build your credit score by paying off your credit card each month.
• You don’t risk losing any assets, such as your home.

A few cons of credit cards are:

• Your eligibility and the amount of credit you qualify for depend on your credit history.
• Your credit score may be affected if you miss payments.
• You may need to pay high interest rates.
• You may not qualify for a credit limit that will pay for your renovations.

Personal Loan

Sometimes, you may choose to take out a personal loan to pay for your home addition if it makes sense financially. If you’re in a position to repay a personal loan quickly and on time, it may be the best option for funding your next home remodeling project. Like other loans, personal loans come with their own advantages and downsides.

A few pros of personal loans are:

• You get quick access to funds, usually within 24 hours.
• You get a lump sum of cash you can immediately use for renovations.
• Your house isn’t used as collateral.
• Your loan terms can be flexible, as agreed upon.

The cons of personal loans include:

• You may pay higher interest rates than you initially expected.
• Your credit score impacts your ability to get a personal loan and how much loan you qualify for.
• There are processing fees and penalties associated with paying off your loan sooner.

Cash

Often, the best way to finance your home improvements is through cash. If you have enough money saved to fund your renovations, consider using it for that purpose. This way, you avoid paying interest, putting up your assets as collateral or negatively impacting your credit score. This financing option is the most straightforward method and comes with the fewest risks.

With the upgrades you’ll be making, you’ll likely see a high return on investment that makes paying with cash worthwhile. No matter your plans for selling your home, upgrading it only improves its value, setting you up for success when it eventually comes time to move on from your house.

Renovation Services From Ideal Construction & Remodeling

Whichever means you choose, whether it’s a personal loan for your home addition or a different option, you can be assured that those funds will help you get a high return on your investment in the future. Once you’ve settled on how you want to finance your home remodel, we can help you get the most out of it by bringing your vision to life with high-quality, professional construction services.

Ideal Construction & Remodeling has generations of experience in home remodeling. If you’re located in McLean, Virginia, or the surrounding areas, we can work with you to build the perfect house addition or complete your dream home renovation. Some of the services we offer include:

• Home additions
• Accessory dwelling units
• Garages
• Sunrooms
• Bathroom remodeling
• Kitchen remodeling
• Basement remodeling
• Energy-efficient remodeling
• Roofing/siding replacements
• Custom home construction

From the initial stages of drafting drawing plans and pulling permits to engaging designers of your choice and completing the construction and finishing of your renovation project, our highly skilled team is with you every step of the way. If you want to remodel your home but aren’t sure where to start, we can help create a plan that makes sense for your goals and needs.

Schedule a Free Estimate Today

If you’re interested in renovating your home in Virginia, turn to the experts at Ideal Construction & Remodeling. Call us at (703) 241-1411 today to schedule a free, in-home estimate.