Basement Financing: 5 Ways to Pay for Finishing Your Basement
Finishing your basement can not only expand your living space, it can also increase the value of your home, with an average of a 70% return on investment nationwide.
If you don’t have the cash on hand to cover the costs, there are a number of ways to finance the project, including a loan to finish a basement remodel and a loan for home improvements.
Read on to learn about the cost of finishing a basement, how to get a loan to finish a basement, and tips for choosing the best loan for your needs.
Key Points
Estimating the total cost of your basement renovation and choosing a financing option that aligns with your budget and goals are critical steps.
Financing for both a home purchase or refinance and renovation may be combined through a government-backed loan.
Using contractor-offered, interest-free financing can be a smart financial tool.
Comparing home equity loans and personal loans to determine which one best fits the scope of your project is highly recommended.
Reviewing the annual percentage rate (APR), origination charges, and potential penalties is essential to understanding the total cost of borrowing.
Cost of Renovating or Finishing Your Basement
The average cost of finishing a basement is around $32,000, but the price can range anywhere from $15,000 all the way up to $75,000.
The size of the basement, the extent of the job, and the types of materials used will help determine the cost, as will the contractor you work with. Contractors’ prices vary, sometimes by thousands of dollars. Choosing the contractor with the lowest price might not always be the best option, however. Be sure to check references first.
Financing Options for Finishing Your Basement
When it comes to home improvement loans, there are multiple options available. Here are the pros and cons of five of the most popular financing options for basement finishing.
1. FHA 203(k) Loans
These government-backed loans combine a mortgage and renovation in one loan. You can use them to purchase (or refinance) a home and to do renovation work. The funds for the renovation are placed in a separate account that the borrower can use as the project proceeds.
You get an FHA 203(k) loan from a bank, credit union, or other lender. Not all lenders provide these loans, so look for one that does. The eligibility requirements can be rigorous — extensive paperwork is needed, including a renovation proposal and estimate of costs, and the approval process may be lengthy. But if you can wait a bit to start your basement project, you may want to consider this option.
Pros of FHA 203(k) Loans | Cons of FHA 203(k) Loans |
• They may have less stringent income and credit score requirements than some other options. • You usually only require a minimum 3.5% down payment (if also used for your primary mortgage). • They come with a tax deduction for homeowners. | • The loan application process is more difficult and extensive than other options. • You’ll likely pay higher mortgage insurance premiums and fees. • They can only be used on the homeowner’s primary residence. |
2. HELOC
A home equity line of credit (HELOC) is a revolving line of credit that uses a certain percentage of your home’s equity as the credit limit. Because your home secures it as collateral, the interest rate on a HELOC is usually lower than other options. This can make a HELOC a popular finished basement loan.
However, the rates on a HELOC are variable, which means they can go up. And if you fail to make your payments, you could lose your house.
Pros of HELOCs | Cons of HELOCs |
• They may offer lower interest rates than other loan products because your home is used as collateral. • You may be able to take a tax deduction. • Funds can be borrowed any number of times during the “draw period” so long as the balance is paid back. | • If payments aren’t made, the lender can seize your house. • Interest rates can fluctuate as index rates change. • It’s easy for homeowners to use the money for additional purposes and take on unnecessary debt. |
3. Financing From Contractors
Many contractors work with lenders to offer financing to consumers. This can be a fast and easy way to get financing, but make sure you understand the interest rate and loan terms. Some contractor financing may come with an interest-free period, meaning that if you pay off the loan in full during that time, you won’t owe any interest. However, if you don’t pay off the entire amount, you may be charged interest from the date you took out the loan.
Pros of Contractor Financing | Cons of Contractor Financing |
• The application process is convenient and easy. • You only borrow exactly what you need. • Some contractors may offer interest-free financing for a period of time. | • It may come with additional fees. • Not every contractor offers financing. • Loan terms may not be as favorable as other loan products. |
4. Home Equity Loans
A home equity loan lets you use the equity you have in your home as collateral to borrow money. Generally, you’re required to have at least 15% equity in your home to be eligible. You’ll receive a lump sum at a fixed interest rate that you pay back monthly over time. Just be aware that if you default on a loan like this, you could lose your house.
Pros of Home Equity Loans | Cons of Home Equity Loans |
• You can get longer loan terms than other options. • Interest can be tax-deductible if the loan is used for home improvements. • Fixed rates mean predictable monthly payments. | • Your lender could take your home if you fail to make payments. • If real estate values decrease, you could owe more than your house is worth. • They can have high fees and closing costs. |
5. Personal Loans
Personal loans allow you to borrow a fixed amount of money and pay it back in monthly installments with interest. Like any method of financing, there are personal loan pros and cons. Many personal loans are unsecured, which means they don’t require collateral. Plus, they are flexible, so the money can be used for just about any purpose.
Personal loan requirements can vary from lender to lender. Typically, the interest rate on a personal loan is largely determined by your credit history and credit score. The higher your score, the more likely you are to receive a lower interest rate.
Pros of Personal Loans | Cons of Personal Loans |
• You may not require collateral. • Monthly payments are predictable. • There are multiple borrowing options — such as fixed or variable interest and short or long terms. • Borrowers of all credit backgrounds may be able to qualify. • The money can be used for just about any purpose. | • Origination and application fees may be high. • Interest rate may be higher than some other lending products. • Some lenders have strict eligibility requirements for borrowers. • There may be prepayment penalties. • Collateral may be required. |
How to Compare Basement Financing Options
As you’re weighing different basement financing options, make sure to look into these important aspects:
APR
The APR reflects the total cost of the loan. It consists of the interest you’ll pay, plus:
Origination fees
Processing fees
Underwriting fees
These fees are often added to the loan amount. This is why it’s important to look at the APR of different loans when comparison shopping.
Recommended: APR vs Interest Rate on Personal Loans
Payment Options
Does the loan for basement finishing come with alternative payment options? For instance, can you pay off the loan early, or is there a prepayment penalty? Is there a late fee if your payment is behind one month? Make sure you know all the payment terms.
Fees
In addition to the fees included with APR, you should also consider a loan’s late fees and prepayment penalties. Does the lender charge an extra fee for borrowers who want to pay off a loan early, and how much is it? If you miss a payment or pay late, what will you be charged?
Term Length
The term or length of a loan affects the total payment you’ll make each month and the amount you’ll pay in interest. A long-term loan comes with a smaller monthly payment, but you’ll pay more in interest over the life of the loan. Short-term loans have higher monthly payments, but they’ll save you interest over time. Determine which option best suits your budget.
The Takeaway
When you’re finishing your basement as a home improvement project, basement financing can help make it happen. No matter what type of renovations you’re doing, financing a basement remodel can help you get the money you need to make over your living space.
It’s wise to shop around for the best financing for your needs, and Lantern by SoFi can make the process faster and more convenient. By filling out one simple application, you can easily compare personal loans from multiple lenders to find one that’s the right fit for you.
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