Home Improvement Loans to Build an Addition to Your House
Building an addition to your home can create value, but can also cost tens of thousands of dollars. If you need financing for an addition, personal loans, home equity, or a line of credit might be worthwhile options to consider.
Homeowners seeking a little extra space can either sell their current home to buy something bigger or transform their current home by building an addition. Common additions include an extra bedroom or office, an extra bathroom, a sunroom, or a detached living space.
Adding to your existing home is one of the best ways that you can increase the equity in your home. Although an addition is a big home improvement project, it is still easier than selling your home and moving. Depending on the size and type of addition you want, the project can be expensive.
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The average cost of an addition is about $43,000, according to Home Advisor, but these projects typically range from $20,000 to $70,000. So, homeowners might need to look for outside financing in order to pay for the new home addition.
How Much Does an Addition Cost?
The costs of adding onto your current home can vary a lot depending on your location, whether the addition is attached to or detached from your home, and the planned use for the addition. The total project costs include all of the materials, tools, and labor.
Building an additional room onto your existing structure can cost an average of $80 to $200 per square foot, according to Home Advisor. The cost is higher when the addition is built as a bathroom because of the added cost of installing plumbing and fixtures. A detached addition without heat and electricity costs around $15,000, and adding heat and electricity raises the cost to around $25,000.
Adding a sunroom costs around an average of $16,000. In order to make sure that you get the best deal possible, you should get quotes from more than one contractor before making a final commitment.
Financing Options for an Addition to Your Home
There are several ways that homeowners can finance the cost of an addition. You should research each of these options to determine which is the best for your particular financial situation.
Personal Loans to Build an Addition
The best personal loans are usually unsecured loans, which means that they do not have an asset serving as collateral for the loan. Therefore, personal loans have a higher interest rate than secured forms of debt. Personal loans are a popular form of home improvement loans because they can be used for any purpose and are relatively quick and easy to obtain.
You can apply online and have the cash within a couple of days if your application is approved. Personal loan interest rates can range from about 5% to 36%, and loan maturity can range from two to seven years. Your credit score is a major factor in the lender’s decision, and the best rates and terms are reserved for borrowers with good credit scores, generally 720 and above.
Personal loans can also include origination fees that may vary from 0% to 7%, so it’s important to consider all of the upfront and monthly costs. If you are building a major home addition that costs over $20,000, however, you might find that a personal loan doesn’t provide enough money to cover the costs.
Compare Home Improvement Financing Options
Home Equity Loan or Home Equity Line of Credit (HELOC)
The home equity loan and HELOC are both ways that homeowners can borrow against the equity that they have built up in their homes. Interest rates tend to be slightly higher than mortgage rates, and your home serves as the collateral for the debt.
The application process is similar to what you experienced when you applied for a mortgage, and the same types of information and documentation are required. Lenders charge origination fees equal to 2% to 5% of the loan amount. The maximum amount you can borrow with a home equity loan or HELOC depends on how much equity you currently have in your home.
If you need a large amount of money, this might be your best option. Furthermore, the interest you pay on your home equity loan or HELOC can be tax deductible if you use the money to build an addition.
Saving Your Money for a Home Addition
Most people probably don’t have an average of $40,000 sitting in a savings account to use on an addition. Waiting to save the money and use cash to pay for the addition is the cheapest option because you avoid paying both origination fees and interest expenses. This, however, might take longer than you are willing to wait.
Other Line of Credit to Build a Home Addition
You might also be able to get some type of financing from the homebuilder or home improvement center that you use to complete the project. This could be a good deal if you can get a large enough line of credit at a reasonable interest rate. Check the terms and interest rates, however, because many of these lines of credit come with interest rates over 20%, which would be costly.
Making a Choice
If you don’t have the cash for your home addition and don’t want to wait to save it, a home equity loan or HELOC might be your best financing option. Both options have relatively low interest rates, and you can probably borrow more than you could with a personal loan. You can get the added benefit of being able to deduct the interest you pay each year from your federal taxes.
Author: Kimberly Goodwin, PhD
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