If you’re ready to increase the size of your property but are still unsure of the best way to finance your addition, you’re in the right place.

Building onto an existing space to create your own dream home can both drastically increase the value of your property and add the extra square footage it’s currently missing.

Having said that, the cost of an addition undoubtedly makes it a large financial commitment and so choosing the right financing option is an important decision.

A quick search will have no doubt thrown up plenty of different ways to finance your project and we’re the first to admit that getting your head around the differences between them all can be confusing.

From a RenoFi Loan to a traditional home equity loan, a personal loan, a construction loan, and more— in this article we take you step-by-step through the different financing options so that you can clearly map out which is the best route to help you borrow the money you need.

But just remember; just because you can use a certain type of loan to pay for an addition, it doesn’t mean it’s going to be the right choice for you. And we’ll break down the pros and cons of six different options to help you to determine which route you should go down.

Just remember that making the wrong choice can increase your monthly payments, limit your borrowing power or both.

Here’s what you’ll learn and everything that we’ll explore:

A Look At The Different Types of Home Additions

Home additions, projects that increase the total living area of your home either horizontally or vertically, can come in all shapes, sizes, budgets, and purposes, which will all likely play a factor when deciding the financing option that’s best suited to your project.

According to HomeAdvisor, the average cost to build an addition or adding a room to your home is $46,343, with most projects coming in between $20,864 and $72,244 depending on the scope and specifications.

Below are three of the most common types of home addition:

Full Addition

The most typical of home additions are full or traditional. These are extra rooms and spaces added to the property, which expand the square footage. Depending on the scale of work, these also take the longest to complete and usually cost the most. This type of project also includes the likes of sunroom and garage additions.

Micro Addition

Rather than creating an entirely new room, micro additions, otherwise known as bump-out additions, extend from existing rooms. Therefore, they provide a simpler and cheaper option for those who don’t feel like they need as much extra space.

Second Story Addition

When building outwards isn’t available to you, a second story addition could be the best choice for creating more space. Perhaps the plot size your home stands on isn’t big enough, or you don’t want to sacrifice the yard space. It’s also worth noting that building up is often somewhat cheaper than adding on.

In many cases, building vertically can provide the ideal solution for additional bedrooms or bathrooms or even a master suite.

3 Reasons Why A Home Addition Is A Great Idea

Your family may have outgrown your home, but you don’t want to move.

Maybe you have been promising yourself that dream kitchen for a while now. Maybe you want to create the space that each person in your family needs as your children grow into young adults.

Everyone has a different motivation for creating an addition to their home, but what are the main benefits of building onto your existing property?

1. Extra Living Space

One of the most common motivations for a home addition is simply to enjoy extra living space that can be tailored to personal needs. Unsurprisingly, increasing square footage is at the top of homeowners' renovation wishlists.

2. Stay In The Neighborhood You Love

Not only can a home addition be cheaper and easier than moving, but perhaps you worry that finding another property in your desired area might be challenging given the housing stock shortage that we find ourselves in the midst of right now. Adding extra space to your existing property saves the disruption of uprooting from friends, neighbors, schools, and the amenities you currently enjoy in your current location.

3. Increase Your Home’s Value

While it is not always guaranteed, typically an addition to your home is going to be a financial investment that increases the overall value of the property. Even if you are not planning to move for a considerable amount of time, an impressive addition will add curb appeal if you do want to sell in the future.

6 Ways To Finance A Home Addition

You’re going to be faced with a number of different options, but they each come with their own advantages and disadvantages.

Take the time to understand the differences between these six different ways to finance your addition and carefully consider which can help you to borrow all of the money you need with the lowest monthly payments.

A RenoFi Loan

RenoFi Loans are a new type of home renovation loan that provide the perfect way to finance a home addition by stretching your borrowing power even further. Unlike traditional home equity loans, RenoFi Loans factor in what your home will be worth after the work has been completed, as a result, increasing your borrowing power by 11x as you can see in the example below:

This makes a RenoFi Loan a great option for recent homeowners who haven’t built up enough tappable equity to take out a home equity loan or home equity line of credit but are nonetheless desperate to get started on the addition.

Considering that increasing the value of your property is often one of the main benefits of carrying out a home addition, this will give you more money to play with to create your dream home, without having to compromise unnecessarily and reduce the scope of your project.

How much more could you expect to borrow with a RenoFi Loan?

Let’s say your home is worth $500,000 right now and you currently have a mortgage of $350,000. With a typical home equity loan, you might expect to borrow around $50,000. But the planned addition to your home will take the value after the project is completed up to $750,000.

A RenoFi Loan, in this example, could let you borrow up to $350,000. That’s a huge increase in your borrowing power.

With terms up to 20 years and your loan based on the after renovation value, a RenoFi Loan allows you to take advantage of lower market rates compared to the higher interest rates of many of the alternatives.

If you already have a great rate locked in on your first mortgage, you’ll be relieved to hear that no refinancing is required. This is a second mortgage that’s perfectly suited to this type of project, which means you can keep your low rates and don’t have to start the clock again on your mortgage.

Put simply, for most homeowners, a RenoFi Loan offers the most money and lowest monthly payment and unlike some of the alternatives, there aren’t any inspections, contractor involvement, or draws to contend with.

Here’s how these loans stack up against some of the other options that you’re probably considering:

Here are the need-to-know details:

• Loan amounts from $20k to $500k
• Low fixed interest rates like traditional home equity loans
• Repayment terms up to 20 years
• Ability to borrow up to 90% of the after renovation value
• The full loan amount available at closing

If you are curious to find out if this type of loan is right for you, why not speak to one of our advisors, or try out the RenoFi Loan Calculator to discover how much you could borrow.

A Home Equity Loan or Line of Credit (HELOC)

A home equity loan or line of credit (HELOC) allows you to tap into any equity you have already amassed through paying off your mortgage to release a lump sum that can then be used to pay for your addition.

You can quickly work out the amount of equity that’s in your home by simply deducting what you owe on your mortgage from the current value of your property. A property that’s worth $600k that has $400k outstanding on the mortgage has $200k equity.

You need to understand though that a typical home equity loan will only allow you to borrow up to 80% of the home’s value, meaning that if your property is worth $500k right now and your outstanding mortgage balance is $350k, the most you’ll be able to borrow is $50k.

But for many homeowners, there’s one huge problem with these loans, and the biggest downside is that if you haven’t owned your home for very long, chances are that you may not have accumulated much equity.

Just take a look at how long it can take to build up $100k equity:

Financing a home addition can be incredibly costly and often needs a large injection of cash and the reality is that those who have only recently bought their property and who haven’t yet got sufficient tappable equity, this isn’t going to be an option.

And even those who have equity available will find that an alternative such as a RenoFi Loan allows them to maximize their borrowing power and not feel any pressure to reduce the scope of their project, knowing that there’s a way to borrow all of the money that’s needed at the best possible rate.

Many homeowners don’t want to wait the many years it can take to build up enough equity, or have to compromise on the scope of the renovations, which often happens. We don’t think this is fair, and is one of the reasons why RenoFi was launched.

A home equity loan or home equity line of credit might be suitable financing options for some smaller projects for homeowners who have lived in their home for many years, but for most, they’re limiting.

A Cash-Out Refinance

A cash-out refinance involves refinancing your mortgage. By replacing your existing mortgage with a loan for a higher amount, you are then free to use the excess money to finance your home addition project.

But yet again, the issue with this option to finance an addition to your home is that it requires you to have generated significant equity in your property. Equity that many homeowners haven’t built up.

That said, even if this is the case and you have lived in your home for many years, the amount that can be released with a cash-out refinance is often capped by lenders at 80% of your home’s current value, again offering far less borrowing power in comparison to a RenoFi Loan.

A Construction Loan

Construction loans were originally created to fund new home builds, but are also a popular method for financing major home renovations. Construction loans are based on the future value of your home after the proposed renovation or construction project, and combine a traditional mortgage with an added loan to fund improvements.

As far as we’re concerned, there are three big reasons you shouldn’t use a construction loan for any renovation, and that includes financing an addition. The first of these is that you are forced to refinance your home, often onto a much higher rate than you’re currently on and, as a result, you could end up paying higher monthly payments in the process.

Secondly, because of the need to refinance for this type of loan, the closing costs you pay are higher, as they are based on the new value of your mortgage as well as your home addition budget, rather than just the renovations on their own.

If that wasn’t enough, lastly, the lenders' fees on construction loans are usually higher than any other type of loan, and that’s not to mention the complex draw process that you’ll need to go through.

There are better ways to finance your addition.

An FHA 203k or Fannie Mae HomeStyle Loan

FHA 203k or Fannie Mae Homestyle loans are two very similar government-sponsored loans that are often used by potential homebuyers who want to simultaneously finance the cost of buying a new home, alongside releasing cash to make improvements. They can also be used to refinance an existing home and add renovation costs to your mortgage.

These loans let you borrow against the predicted value of your home after work has finished in the same way that a RenoFi Loan does, therefore increasing your borrowing power. But the complexities of trying to take out one of these types of loans may leave your head spinning and put many people off.

The process is far from straightforward. There is a long list of qualifying criteria, and the steps for both an FHA 203k or Fannie Mae HomeStyle loan can be lengthy and complicated, however given their lower credit score requirement than other options, they’re sometimes the only financing method available to someone with a poor credit history that is looking to borrow based on their home’s after renovation value.

Take a look at our FHA 203k loans vs Fannie Mae HomeStyle loans guide to learn more.

A Personal Loan / Home Improvement Loan

You’ve probably come across home improvement loans and seen these recommended as a great way to finance an addition. But what you’re probably not aware of is that these are commonly unsecured personal loans that are marketed at those who are looking for a way to finance a home improvement project.

For most homeowners, neither personal loans or home improvement loans (or credit cards, which it’s worth mentioning here as they’re sometimes used to pay for smaller home improvement projects) are going to be the best way to finance an addition for two reasons: limited borrowing power and a high interest rate.

Of course, a higher interest rate means higher monthly payments and it’s worth noting that these can often be somewhere between 8% and 15%. On credit cards, this will usually be even higher.

A personal loan will also typically have far shorter repayment terms than other loan options, further increasing your monthly payments .

That said, because of the quick and simple application process and the ease to obtain, personal loans can be tempting for lower-cost projects that other options wouldn’t be suited to, despite not being the best financing option for most homeowners looking to finance an addition.

What’s The Best Way To Finance An Addition?

We believe that, for most homeowners at least, the most appealing way to finance an addition to your home is through a RenoFi Loan, given that it combines all the best features of other loans on the market.

They are the only home addition financing option to include all of the following benefits:

1. A loan based on the after renovation value
2. The potential to borrow up to 90% of the after renovation value of your home
3. No refinancing required
4. No inspections and draws needed

Just because you haven’t built up sufficient tappable equity to get a home equity loan or line of credit, it doesn’t mean you should be forced to reduce the scope of your project. And with other options available, you don’t have to.

But we cannot stress enough the importance of taking the time to fully understand the different financing options that are available to you and to know the pros and cons of each.

And this means asking yourself the following questions so that you can determine which route to go down:

• How much is your addition going to cost?
• How much equity do you have in your home?
• What’s your credit score and credit history?
• Do you have any other debt on other loans and credit cards?
• What is the maximum monthly payment you can afford?
• How long do you want to repay the loan over?

Home Addition Financing FAQs

Below you’ll find answers to some of the most common questions that homeowners have when considering different financing options for their addition.

If you would like to leverage maximum borrowing power while still taking advantage of the lowest interest rates and monthly payments, then we’d love to chat with you further about a RenoFi Loan.

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