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How to Finance a Home Addition

Posted on March 3, 2023March 24, 2023 by Foundation for the Future

As the adage goes, the home is where the heart is. From living in a new apartment to purchasing a property, there are a million ways to ensure that your life is comfortable here. Regarding the latter, your property can be seen as an investment for the future. Over time, you can configure and reconfigure it as you see fit.

Many homeowners ready to make that jump will often seek a home addition. These not only look great once completed, but they can increase the home’s value tenfold. However, they may also cost a pretty penny to do so. Use the following tips to effectively finance the home addition of your dreams.

1. Personal Loans

Some of the most basic ways of financing a huge project are to get a financial loan. These are the type of loans that can be easy to garner, especially if your credit score is a bit unsteady. On the other hand, they can be a fast and reliable means of ensuring the project goes as planned. There are just a couple of factors to keep in mind at the onset.

For starters, personal loans will generally have higher interest rates to take note of. This means that your monthly payments will be higher than what may be anticipated. Moreover, there could also be shorter repayment terms compared to other financing means. Make sure to consider all of this before going ahead with one.

2. Construction Loans

As opposed to other forms of financing, a construction loan could be a one-stop shop for the home addition. Usually, it is a type of loan that has to do with financing major home renovations. No matter what sort of addition you plan on constructing, a construction loan could be your best bet moving forward. It will allow you to afford the best home builders for your project.

Like any other type of financing, there are some caveats to be aware of. Similar to a personal loan, there are usually higher interest rates. Your monthly payments may be a bit higher than what you’d expect, but the process of finishing the loan could be worth it. Speak to a financial advisor to get more information in this respect.

3. Refinancing

Any homeowner you know has probably discussed their mortgage terms with you at some point. The monthly payments on a home could range from tolerable to something more substantial. However, there is a possibility of using the mortgage terms to finance further home additions.

Case in point, it may be worthwhile to refinance your mortgage terms as a whole. This can occur when you replace your current mortgage with a loan for a higher amount. The new loan can then be used for various means, such as financing your new home addition. Just be sure that your home has enough equity inside of it to proceed with this option.

4. Home Equity Line Of Credit

Speaking of equity, there are more options to use when it comes to leveraging your home’s worth. For example, if you have enough equity built up, you could use that in a home equity line of credit. Also known as a HELOC, this is a type of loan that uses what equity is in the home to pay for your home addition.

The HELOC, like any other equity-based loan, could be used for pretty much any major renovation you desire. However, there will be further terms to take stock of before you get approved for a HELOC. For instance, most HELOCs will only allow you to borrow up to eighty percent of the home’s value. Take all of this into consideration before making the right choice!

5. Newer Loans

Since the world of financing is constantly evolving, there are always newer types of loans to get acquainted with. For example, home additions could usually manifest through a RenoFi loan. In essence, this type of loan depends on what the home will be worth in the future, based on the installed addition.

Typically, a very forward-thinking version of the loan ensures your borrowing power is stretched. When it comes to ensuring you have the right type of financing, you have plenty of options to choose from.

6. Cash Out

Sometimes, the hardest option may also be the simplest to use when it comes to adding in a home addition. Paying a lump sum of cash towards your home addition could work in theory, provided you have the means. The benefits of doing so mean you will not have to worry about typical loan terms. Whatever you end up choosing, your home addition will be worth it!

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