Basement Financing: 5 Ways to Pay for Finishing Your Basement

Lauren WardUpdated October 12, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Finishing your basement can not only expand your living space, it can increase the value of your home. According to Zillow, a remodeled basement gives about a 70% return on investment. 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 house 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.

Cost of Renovating or Finishing Your Basement

The average cost of finishing a basement is around $18,000, but the price can range anywhere from $3,000 all the way up to $80,000. 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. Recommended: Budget-Friendly Home Office Ideas

Financing Options for Finishing Your Basement

When it comes to loans to finish basements, there are multiple options available. Here are the pros and cons of five of the most popular basement finishing financing options.

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 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 offer these loans, so look for one that does. The eligibility requirements can be rigorous — a lot of 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
• Easier income and credit score requirements than some other options.• Only requires a minimum 3.5% down payment (if also used for your primary mortgage).• Comes with a tax deduction for homeowners.	• Loan application process is more difficult and extensive than other options.• You’ll likely pay higher mortgage insurance premiums and fees.• 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 it’s secured by your home as collateral, the interest rate on a HELOC is usually lower than other options. This can make a HELOC a popular finish 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
• 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 are not 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
• Convenience and easy application process.• You only borrow exactly what you need.• Some contractors may offer interest-free financing for a period of time.	• May come with additional fees.• Not every contractor offers financing.• Loan terms may not be as favorable as those with 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 are 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.• Predictable monthly payments because of fixed rates.	• 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.• Can have high fees and closing costs.

5. Personal Loans

Personal loans defined mean that you 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. The basic 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 may be to receive a lower interest rate.

Pros of Personal Loans	Cons of Personal Loans
• May not require collateral.• Predictable monthly payments.• 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.

Factors to Consider When Comparing Basement Financing Options

As you’re weighing different basement financing options, make sure to look into these important aspects:

APR

The APR (annual percentage rate) reflects the total cost of the loan. It consists of the interest you’ll pay plus:

Origination fees
Appraisal 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.

Payment Options

Does the loan for basement finishing come with alternate 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 that want to pay off a loan early and how much is it? If you miss payment or are 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 in interest over time. Determine which option best suits your budget.

Exploring Personal Loan Options

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 as you’re exploring personal loan options, 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.Compare personal loan rates today with Lantern!

Photo credit: iStock/FOTOGRAFIA INC.

Frequently Asked Questions

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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