Financing a Home Addition in 9 Ways

Kim Franke-FolstadUpdated March 12, 2023

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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.

If you love your house but need more space, you may be considering a home addition. And figuring out how to pay for the project is likely top of mind. Fortunately, there are plenty of options for financing a home addition. Each of them has pros and cons, so it’s smart to learn about them before you make a final decision. Our guide will give you the information you need to know.

How Much Does a Home Addition Cost?

A home addition typically costs between $22,413 and $80,899, but the price tag could exceed $100,000. Costs can vary widely depending on the size and scope of the project, whether you hire a professional to do the job, the finishes you choose, and other factors. For instance, you might decide to winterize your house while you're at it, which could increase the price tag.Something else to keep in mind as you set your timeline and budget: The cost of building materials has surged over the past year, thanks to supply chain bottlenecks and inflation. So the cost of adding even a simple porch or using sunroom financing to build a small addition in the backyard could be more than you expect. While you’re determining how to finance a home addition, you also may want to build in a contingency fund (generally 5% to 8% of the overall project cost), to cover unexpected problems or changes that might come up. Recommended: How Much Does It Really Cost to Remodel a House?

Options for Financing a Home Addition

So what can you do if you have big plans for an addition but your savings won’t cover all the costs? Read on for nine examples of how to finance a home addition.

1. Personal Line of Credit

A personal line of credit is a type of revolving credit account that offers borrowers the flexibility of a credit card, but it typically comes with a higher credit limit and a lower annual percentage rate (APR). A personal line of credit allows you to draw funds as needed (up to a limit) during a predetermined draw period. You can then pay as much as you want toward your balance each month, as long as you make at least the minimum payment due. And the money you repay is added back to your credit limit, so it’s available to use again.The flexibility of a personal line of credit can have a downside, however. If you can’t stay on top of paying back what you borrow, the balance can grow out of control.You typically don’t have to secure a personal line of credit with collateral. However, the APR may be higher. And if you have poor credit, you may have difficulty finding a lender that will approve your application.

2. Credit Card

Depending on the scope of your addition, it may make sense to use a credit card to pay for it—especially if you have strong credit and can qualify for a card that offers a low or 0% introductory APR. This option is similar to a personal line of credit, in that it allows you to borrow only what you need. But using a credit card also requires financial discipline to make your payments. And if you can’t pay off your charges before the low introductory rate expires (typically 12 to 18 months), the interest you’ll pay on your remaining balance will be based on the higher APR that kicks in after the promotional period ends.

3. Cash-Out Refinance

If you’ve built equity in your home you may want to think about using cash-out refinance to help pay for your project. With this strategy, your current home mortgage is replaced with a new, larger mortgage, and the difference is converted into a lump-sum cash payout that you can reinvest in your home addition.Generally, lenders put a cap on cash-out refinances at 80% of the equity a borrower has in the home. This is your home’s loan-to-value ratio (LTV). So when you apply, you can expect lenders to look at your home’s current appraised value, the LTV, and other factors, along with your personal creditworthiness. This means the process typically takes longer than applying for a credit card or personal loan. And you will likely need to pay closing costs and possibly some other fees. You’ll also have a longer loan term—and a new interest rate, which will be based on current market interest rates.

4. Cash

If you have money on hand, you could decide to pay for your home addition with cash. One downside: If you don’t have enough in the bank to cover the entire cost of the addition, you might have to put off your plans for a while to save for the project. Even if you have enough money, you may want to evaluate how paying in cash could affect your other needs and goals. For instance, if paying in cash means dipping into your emergency fund, you may want to explore other financing options.

5. FHA 203(K) Loan

For those planning to purchase and expand a fixer-upper, an FHA 203(K) loan could be a financing solution worth considering. These government-backed loans are intended to help lower-income buyers who want to improve an older property they plan to use as their primary residence. It’s a mortgage that combines the home’s purchase price with the expected renovation cost. The funds are then placed in a separate account the borrower can use as the project proceeds.The eligibility requirements can be daunting with this type of loan. But if you can pull together the paperwork—including a renovation proposal and estimate of costs—you may want to talk to an FHA-approved lender about this option.

6. Home Equity Line of Credit (HELOC)

A HELOC is a type of revolving credit, similar to a personal line of credit. But in this case, the money you borrow is secured, using your home as collateral. Your credit limit will be based in part on the amount of available equity you have in your home. And you must have enough equity (usually at least 10% to 20%) to qualify. Since a HELOC is secured, the interest rate you pay could be significantly lower than with a personal line of credit. But if you default on your payments, the lender could foreclose on your home. In addition, if you sell your home, you’ll have to pay off any balance you still owe on a HELOC.

7. Construction/Renovation Loan

Construction loans are typically used by borrowers who are building a new house, but you also may be able to use this type of loan for a home addition. Because the loan amount is based on the projected value of the property once the work is completed (instead of its current value), you may be able to borrow more money with this type of home addition financing. If you don’t have a lot of equity in your home, or you’re looking at an expensive project, a construction or renovation loan could be a solution. There are different types of construction/renovation loans, so you’ll want to be clear about the costs and conditions before signing.For instance, some loans may require that the lender retain control of the funds—and pay your contractor at various stages in the building process—instead of giving you the loan as a lump sum. There also may be limitations on how the funds can be used. Finally, some renovation loans have longer terms than others.

8. Home Equity Loan

A home equity loan is similar to a HELOC in that you’re borrowing based on the equity in your home and using your home as collateral. And like a HELOC, you’ll probably need to have at least 10% to 20% in equity to qualify. What makes a home equity loan different is that it’s a loan you repay in installments. It has set monthly payments, a predetermined loan length (anywhere from five to 30 years), and you’ll receive the money in a lump sum. Because it’s a secured loan, the interest rate may be lower than with other types of financing. But there are some potential drawbacks. If you default on your loan, the lender might choose to foreclose. And if you decide to sell your home, you’ll have to repay whatever you still owe on the home equity loan. Your timeline also may be a factor. Because a home equity loan is based on your home’s value as well as your creditworthiness, the application process can take longer than it would for an unsecured loan.

9. Personal Loan

If you don’t like the idea of using your home as collateral, and you want to get your project started sooner rather than later, you may want to consider a personal loan for your home improvement financing. With a personal loan, lenders focus on your creditworthiness. So, the approval process typically takes less time and has fewer upfront costs than what you can expect with a home equity loan, HELOC, or other financing options that may require extra paperwork and a home appraisal. You also can get preapproved for a personal loan, which means you give a lender some basic information and quickly get an estimate of what your loan terms might be and if an approval is likely. When you apply for a personal loan, lenders will look at factors like your credit score, your income and employment status, and how much debt you’re carrying. Those factors will also go into determining the interest rate, loan amount, and loan length you’re offered. The downside? Interest rates may be higher with a personal loan. But if you’re looking for a loan for a house addition that’s easy to apply for, has fixed payments that work with your budget, you may find a personal loan right for you.Recommended: 5 Typical Personal Loan Requirements

Personal Loans with Lantern

As you’re planning your home addition, it’s a good idea to shop around for the financing option that makes the most sense for your project. And if you’re considering a personal loan, Lantern by SoFi can help make that process quicker and more convenient. With just one application, you can get offers from multiple lenders, making it easier to compare personal loan rates and terms.Ready to build a home addition? Compare personal loan rates with Lantern today!

Frequently Asked Questions

Can you use a personal loan to finance a home addition?

What is the maximum amount of financing I can get for a home addition?

What are my options to finance a home addition?

Photo credit: iStock/skynesher

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About the Author

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.

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