Best Home Addition Loans Plus 10 Financing Options to Build On to Your House

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. 

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. 

It’s important to shop around if you’re considering a home equity loan. The best one 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.  

A HELOC is a revolving credit line secured by home equity. You can typically withdraw funds as needed during the draw period, which lasts five to 10 years, and repay the balance over 10 to 30 years. This flexibility makes HELOCs useful for home additions with unpredictable costs.

Some HELOCs, like Figure and Aven, require you to take the full loan amount upfront. These options function more like home equity loans, providing a lump sum with structured repayment. This can be a good option if you prefer a fixed borrowing amount rather than accessing funds over time.

Interest rates on HELOCs are often variable, meaning they can fluctuate. Some lenders offer fixed-rate conversion options for stability. When comparing lenders, check whether they offer variable or fixed rates and how those changes might impact your payments.

Most lenders require a credit score of at least 620, but 700 or higher gets better rates. You’ll also need 15%-20% home equity (see how to calculate your home equity here). Some lenders allow drive-by or virtual appraisals, while others require a full appraisal, which could add time and costs to the process.

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.

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.

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). 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. You typically need a credit score of at least 500.
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 provide a lump sum that you repay over time with interest. Loan amounts can reach $100,000, and most loans are unsecured, meaning no collateral is required. Fixed rates make monthly payments predictable, which can help with budgeting.

You can use a personal loan for various home addition costs, such as supplies, contractor deposits, and permits. Since these loans don’t rely on home equity, they’re a good option for homeowners who don’t want to use their property as collateral.

Lenders typically require a credit score of at least 600, though 680 or higher secures better rates. If your score is lower, improving it before applying or finding a lender that considers alternative factors may help.

Comparing lenders can help you find the best rates, terms, and fees. Many allow prequalification with a soft credit check. Once approved, you may receive funds as soon as the same day, depending on the lender.

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. 

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.  

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. 

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. 

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. 

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. 

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.