Home Improvement Loans to Build an Addition to Your House

Adding a room to your home can give you more living space and even boost the property’s value. One of the main questions to consider when planning an addition is how you’ll pay for the project.

Home addition loans can provide the funding you need to keep your project on track. You have several options to finance a home addition, including home equity loans and personal loans. We’ll walk you through what’s required for a home addition loan and where to find them.

How to finance a home addition: 10 options

We’ve identified 10 financing options for your next home addition project. Some of these options rely on the equity you’ve built, and others don’t. Equity represents the portion of your home that you own outright. 

Here’s a breakdown of each option:

Financing method	Equity required?	Best for
Home equity loan	✔️	Borrowers looking for low, fixed rates
Home equity line of credit (HELOC)	✔️	Homeowners needing flexibility
Cash-out refinance	✔️	Restructuring mortgage
FHA 203(k) rehab loan	✖️	Combing renovation and mortgage costs
Personal loan	✖️	Borrowing up to $100,000 without needing equity
Mortgage renovation loan	✖️	Financing renovations without equity
Personal line of credit (PLOC)	✖️	Borrowers in need of flexibility without equity
Construction loan	✖️	Large-scale home renovations
Manufacturer or contractor financing	✖️	Zero-interest financing through contractors
Personal savings	✖️	Avoiding debt with self-financing

Now, let’s dive into the specifics of each option below.

Home equity loan

A home equity loan allows you to borrow against your equity, but you get a lump sum rather than a revolving credit line. The amount you can borrow is often the same as a HELOC, with lenders capping it at 80% to 85% of your equity. 

Interest rates are often fixed for home equity loans, and repayment terms can last up to 30 years. Home equity loans can have closing costs, just the same as a purchase mortgage. However, your lender might cover the costs or allow you to roll them into the loan. 

Pros

• Can offer low, fixed interest rates that won’t change over time.

• Longer repayment periods can translate to lower monthly payments.

• Interest may be tax-deductible when used solely to fund home improvements if you choose to itemize your deductions.

Cons

• Pay interest on the entire loan amount, even if you don’t use all of it.

• A longer repayment term can mean paying more interest in total.

• Two mortgage payments can add strain to your budget.

If you’re interested in home equity loans, you might check rates and terms with your current lender first, and look for alternatives online. Online lenders offer some of the best home equity loans and feature a combination of low rates and generous loan limits. 

As with HELOCs, it’s important to shop around. The best home equity loan for you is the one that allows you to borrow the amount you need to cover a home addition, with repayment terms that align with your budget.  

Best HELOCs and home equity loans for home additions

Home equity line of credit (HELOC)

A home equity line of credit is a revolving credit line secured by your equity. You can take money from your credit line as needed during the initial draw period and repay it during the repayment term. Draw periods can last five to 10 years, followed by a 10- to 30-year repayment period. 

You might prefer a HELOC if you’re unsure how much you’ll need to pay for a home addition. HELOC rates are often variable, but certain lenders may offer fixed-rate options. The maximum loan amount varies, but most lenders allow you to borrow up to 85% of your equity. (See how to calculate your home equity.) 

Pros

• Only pay interest on the part of the credit line you use.

• Some lenders offer fixed-rate options, which can make it easier to budget for repayment.

• Depending on the lender, you might be able to make withdrawals via check, debit card, or electronic funds transfer.

Cons

• A variable-rate HELOC could be risky if rates rise during the loan term.

• Lenders may charge annual fees or other fees.

• Interest-only payments are often required during the draw period.

Best home addition HELOCs

Numerous lenders offer home equity lines of credit. You might start with your current mortgage lender to see what’s available before branching out your search to compare the best HELOC rates.

When shopping for HELOC options, consider how much of your equity you can borrow and whether you’re paying a fixed or variable rate. Variable rates can increase or decrease over time. 

Also, check for fees the lender might charge and the appraisal requirements. Some lenders might allow for a drive-by or virtual appraisal, but others require an in-person appraisal. 

Cash-out refinance

A cash-out refinance is a way to withdraw equity from your home while changing the terms of your current mortgage. A cash-out refinance replaces your mortgage with a new home loan and allows you to walk away with cash at closing. 

Your new mortgage includes the remaining amount due on the old loan, along with the amount of equity you withdraw in cash. Instead of making two loan payments, as with a HELOC or home equity loan, you’d just have one. 

Pros

• Put cash in your hand without adding a monthly payment to your budget.

• Depending on which type of loan you get, you may be able to withdraw up to 100% of your equity in cash.

• Cash-out refinance loan rates are often fixed, so you don’t need to worry about rates or payments increasing.

Cons

• You’ll have a new, larger mortgage payment.

• Your lender may charge origination fees or closing costs, which is often deducted from the cash you get.

• Reduces your home equity.

The same lenders that offer home equity loans or HELOCs may also offer cash-out refinancing. When you’re shopping for the best cash-out refinance options, consider how much cash you need to withdraw to complete a home addition. 

Taking out all your equity in cash might seem wise, especially if you lock in a low interest rate. But this can leave you with more to repay, and decreasing your equity could put you at risk of owing more than your home is worth if the value drops.

FHA 203(k) rehab loan

An FHA 203(k) loan lets new homebuyers combine their mortgage and home renovation costs into one loan. Homeowners can also use it to refinance a home that needs renovations. The loan can help cover labor and material, but the work must start within 30 days of funding and finish within six months. 

The FHA 203(k) program offers two types of loans:

1. The Limited FHA 203(k) for minor repairs up to $35,000
2. The Standard FHA 203(k) for major renovations 

The cost of the rehab must be at least $5,000, and the FHA insures the loan, which you’ll borrow from a private lender (not directly through the government or FHA). 

Pros

• Combines mortgage and renovation costs.

• Flexible qualification and credit requirements.

Cons

• Strict timelines for renovation.

• Limited to FHA-approved projects.

How to get an FHA 203(k) loan

Here are the stages of the application and borrowing process:

1. Application and approval: Borrowers must meet the FHA requirements and submit their home renovation plans. 
2. Appraisal: The home is appraised based on the expected value after the renovations.
3. Closing: Funds are released, and the renovation work must start within 30 days.
4. Draw periods: Contractors can request payments at various stages of the renovation. 
5. Final inspection: A final inspection confirms all the work is done. 

Personal loans

Personal loans allow you to borrow a lump sum of money and repay it over time, with interest. Depending on the lender, you might be able to borrow up to $100,000 with no collateral required. Rates are typically fixed, allowing for predictable monthly payments. 

You could use a personal loan as needed to cover home addition expenses, including purchasing supplies or materials, paying deposits to contractors, or obtaining permits. Most personal loans are unsecured, meaning you don’t need collateral to obtain them.

Pros

• Allow for flexibility in how you spend the proceeds.

• You’re not obligated to leverage your home equity to qualify for a loan.

• Loan amounts can be generous, allowing you to fund larger-scale addition projects.

Cons

• Borrowers with lower credit scores will likely pay a higher interest rate for a personal loan.

• Lenders may charge origination fees, prepayment penalties, or other fees.

• You may need to take out multiple loans if the budget for your renovation project exceeds $100,000.

Best home addition personal loans

Mortgage renovation loan

A mortgage renovation loan lets you combine renovation costs with a mortgage into a single loan. This type of loan simplifies financing for large-scale renovations by rolling costs into monthly payments. Unlike an FHA 203(k) loan, a mortgage renovation loan offers more flexibility in terms of project types and offers higher loan amounts. 

The Fannie Mae HomeStyle Renovation mortgage loan covers a wide range of renovations. You can finance up to 75% of the appraised “as completed” value of the home with down payment options as low as 3%. You’ll need a stronger credit score to qualify for this loan than for the FHA 203(k) loan. 

Pros

• Combines renovation and mortgage costs into one payment.

• Lower interest rates than a personal loan.

Cons

• Not backed by the Federal Housing Administration.

• Requires strong credit history for approval.

Personal line of credit (PLOC)

A personal line of credit (PLOC) is a revolving credit line issued by a bank that lets homeowners borrow and pay back funds as needed. Unlike HELOCs, PLOCs are unsecured, meaning you don’t need to use your home as collateral. Also, the draw and repayment periods are typically shorter with a PLOC and range from three to five years.  

Pros

• Your home doesn’t need to be used as collateral.

• Flexibility to borrow when you need it.

Cons

• Higher interest rates compared to a secure loan.

• Shorter repayment period compared to HELOCs.

Construction loan

A construction loan is a short-term loan used to finance home additions and large renovation projects. As the project progresses, the funds are disbursed in increments. This is often done by a contractor requesting funds directly from the lender.

Construction loans have several variations, with a construction-to-permanent loan being the most common. You can use this variation to fund a home addition project. At the end, the loan converts to a traditional mortgage. If you already have a mortgage, a construction loan may complicate the situation by adding an additional monthly payment on top of your primary loan. 

Pros

• Best for large-scale projects.

• Converts into a long-term mortgage.

Cons

• Can be complicated and expensive.

• Stricter approval process than many other loans.

Manufacturer or contractor financing

Manufacturer financing and contractor financing are two possibilities for financing a home addition. With these options, you might borrow from the builder or through a home improvement center to cover any necessary expenses. 

These types of home addition loans can be attractive because they’re often easier to qualify for than a personal loan. However, borrowers with fair or poor credit could pay much higher interest rates. 

Pros

• May be easier to qualify for than a personal loan.

• Zero-interest financing might be available, allowing you time to pay off the loan without interest charges.

• Typically no origination fee or prepayment penalty for these types of loans.

Cons

• Interest rates can be much higher than other loan types, creating a more expensive way to borrow.

• If you don’t pay off your zero-interest financing balance before the promotional period ends, the accrued interest is tacked on to what you owe.

• You might be able to borrow more with a personal loan.

If you hire contractors to complete a home addition, ask what financing options they might offer, if any. GreenSky, for example, works with a number of home improvement companies and contractors to extend financing to its customers. 

You can also look into financing options through home improvement centers. For example, Home Depot and Lowe’s offer in-store financing options to customers. Smaller, local home improvement stores in your area might also offer in-store credit programs. 

Personal savings

Using personal savings to fund a home addition is an excellent way to avoid taking on debt. You can pay yourself back over time without interest or fees. And you don’t need to worry about a low credit score being a barrier to qualifying for a loan. 

Pros

• Won’t add new debt payments to your budget.

• Draw down savings as needed to cover home improvement expenses.

• No interest or fees to pay to a lender, which can save you money.

Cons

• Wiping out your savings for a home addition could be risky if you don’t have a cash cushion to rely on in an emergency.

• Savings alone might not be enough to fund a larger home addition project.

• Some homeowners may not have savings to earmark for home improvements.

Many homeowners choose to set up a savings account just for home improvements. If that’s something you’re interested in, you might consider opening a high-yield savings account at an online bank. High-yield accounts can offer the best rates while charging the lowest fees. 

You could also use a certificate of deposit (CD) account to save if you know you won’t need the money for a certain period. Aside from savings or CD accounts, you might also consider borrowing money from a retirement savings account. For example, you can take a loan from your IRA to pay for a home addition. 

What are the requirements for a home addition loan?

The requirements for home addition loans can depend on the type of loan you’re seeking. 

For instance, using a home equity loan or home equity line of credit (HELOC) to pay for an addition requires you to have a certain amount of equity in the property. 

Personal loans and contractor financing are often unsecured. With these types of loans, the lender is more interested in your credit history and income than how much equity you have. 

Here is a breakdown of requirements for some of the finance options mentioned:

Loan type	Equity required?	Credit score	Income req’s
Home equity loan or HELOC	✔️	620+	Based on lender’s criteria
Personal loan	✖️	600+	Varies
FHA 203(k) loan	✖️	500+	Per FHA guidelines
Contractor financing	✖️	Varies	Depends on the contractor
Construction loan	✖️	620+	Based on lender’s criteria

How much does a home addition cost?

The national average cost of a home addition as of September 2024 is $50,360, according to HomeAdvisor. A typical range is $21,961 to $82,353. Common additions, such as bathrooms, bedrooms, and kitchens, range from $35,000 to $100,000, depending on the size and building materials. 

Here are other examples with average costs of the project:

Type of addition	Average cost
Bedroom	$62,500 – $100,000
Bathroom	$35,000 – $90,000
Kitchen	$20,000 – $125,000
Family or living room	$20,000 – $45,000
Attic	$40,000
Laundry room	$8,100
Dining room	$20,000 – $45,000
Mudroom or sunroom	$8,000 – $16,000

It’s important to consider these costs when weighing your home improvement financing options. Based on these rates, larger projects might need a home equity loan or construction loan. Smaller projects could be covered by a personal loan or HELOC. 

When does it make sense to build a home addition?

Erin Kinkade

CFP®

Examples of when it might make sense to make additions to the home would be if somebody wants to stay in the home but needs to make changes for multiple reasons (such as health); to make it more retirement-friendly (adding leisure space); or wanting to rent out the home but needing additions or improvements to make the home more marketable (because more rentals are coming on the market, making the rental space more competitive).

The cost of a home addition can depend on several factors, including the type of addition, the style, the materials, and where you live. 

The DIY approach could save money on labor costs, but a large-scale addition might not be a project you could handle yourself. In that case, you’ll also need to budget for hiring contractors, and additional expenses may be involved if you need to secure permits for construction. 

Taking time to plan your budget can help you avoid getting blindsided by unexpected costs. It can also help you decide which home improvement financing option makes the most sense.

FAQ 

What credit score do I need for a home improvement loan?

The minimum credit score you’ll need for a home improvement loan can vary by lender and loan type. Some lenders have no minimum requirement, but others may prefer borrowers to have a score of 660 or better to get approved and secure the lowest interest rates. 

What is the typical interest rate for a home improvement loan?

The interest rate for a home improvement loan could range from 5% to 35%. Your exact rate will depend on your credit history and other qualifications. Getting a lower rate on a home addition loan is ideal because it makes borrowing less expensive overall. A lower rate can also result in lower monthly payments. 

Can I deduct the interest on my home improvement loan?

Interest on a home equity loan or HELOC may be tax-deductible if you meet certain conditions. The IRS only allows a deduction when the proceeds of the loan are used to “buy, build, or substantially improve” the home the loan secures, and you itemize your deductions when you file taxes. Personal loan interest is never tax-deductible. 

What happens if I can’t repay the loan?

If you fail to repay a home improvement loan secured by your equity, your lender could initiate foreclosure proceedings against you. That could lead to the loss of the home. Failing to repay a personal loan or contractor financing may land you in small claims court if the lender decides to sue.

Is it better to take out a personal loan or use home equity for a home improvement project?

Whether it’s better to take out a personal loan or use home equity for home improvements can depend on how much you need to borrow, how much equity you’ve accumulated, and how comfortable you are leveraging it for a loan. Personal loans can carry fewer risks, but you might be able to borrow more by using your equity as collateral. 

Are any grants available for home improvements?

The Department of Agriculture sponsors the Section 504 loan program, which provides loans for home repairs or improvements to eligible borrowers. Loans are restricted to homeowners 62 and older with low income who can’t qualify for funding from another source. 

How long does the approval process take for these loans?

The approval process for personal loans is often much faster than home equity loans or HELOCs. You might be able to get approved the same day, depending on the lender. Approval for a home equity loan or HELOC, on the other hand, may take several weeks. 

How do I determine how much financing I’ll need for my project?

Working out a detailed budget can help you decide how much financing you’ll need for a home addition. When creating your budget, factor in the cost of supplies and materials, labor if you’re hiring contractors, and any necessary permits. You may also want to add in a buffer of 10% extra to cover unexpected costs.