Whether it’s adding an extra bathroom, renovating a kitchen or finishing the basement, home reno loans make it easier to turn your fixer-upper into your dream house. And by financing with a mortgage, you’ll build equity more quickly and save money on interest over time.
What type of loan is best for a home addition?
The best loan options for home improvement projects depend on your situation and the amount of equity you’ve built up. If you’re an existing homeowner with good equity and a low mortgage rate, consider a home equity loan or line of credit. This lets you borrow up to 80 percent of your equity. You’ll typically pay closing costs and a monthly interest payment. And you’ll want to carefully budget for this additional monthly cost if you still have a balance on your original mortgage.
Unsecured personal loans are an alternative, but their higher interest rates and short repayment terms can put a financial strain on your budget. Some also come with expensive prepayment penalties and high borrowing limits.
Freddie Mac’s CHOICERenovation and FHA’s 203(k) loan programs let you finance both your purchase price and renovation costs in one mortgage. This approach, which is based on your home’s expected value after renovation, can let you qualify for more than a traditional mortgage loan, and it may be less costly than a cash-out refinance or a personal loan. It also helps you build equity faster and gives you more control over the final home price when you sell.