Financing a Home Addition in 9 Ways

Adding space to your home may be an exciting project, whether you're building a new bedroom, expanding the kitchen, or creating an office. However, home additions come with significant costs, and financing them may require thoughtful planning. 

Fortunately, there are various financing options to make your dream addition affordable and achievable. From home equity loans to personal loans and specialized renovation financing, homeowners may choose among options that fit their financial situation and project scope. 

This article explores nine effective ways to finance a home addition, helping you to start your renovation with confidence.

How Much Does a Home Addition Cost?

A home addition typically costs between $21,902 and $83,358, but the price tag could exceed $150,000. Costs may 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 is that the cost of building materials has continued to rise over the past year, driven by ongoing inflation and other cost pressures. So the cost of adding even a simple porch 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 10%-15% above estimated costs) to cover unexpected problems or changes that might come up. 

Options for Financing a Home Addition

So what do 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 gives borrowers the flexibility of a credit card, but it may come 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). You 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, making it available to use again.

The flexibility of a personal line of credit has a downside, however. If you’re unable to stay on top of paying back what you borrow, the balance could 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 willing to approve your application.

Recommended: What Can Be Used as Collateral for a Personal Loan?

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 could qualify for a card that includes 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 12-21 months), the interest you pay on your remaining balance may 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 a 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 may reinvest in your home addition.

Generally, lenders put a cap on cash-out refinances at an 80% loan-to-value ratio (LTV). So when you apply, expect lenders to look at your home’s current appraised value, your existing mortgage balance, 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’re likely to need to pay closing costs and possibly some other fees. You also have a longer loan term — and a new interest rate, which is typically 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 that the borrower may use as the project proceeds.

The eligibility requirements may be daunting with this type of loan. But if you manage to 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 is typically based in part on the amount of available equity you have in your home. And you need to have enough equity (usually at least 15%-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 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 much 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 and renovation loans, so you 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 may also be limitations on how the funds may 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 probably need to have at least 15%-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 5-30 years), and you 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 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 may 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 generally expect with a home equity loan, HELOC, or other financing options that may require extra paperwork and a home appraisal. 

You may also 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 whether an approval is likely. 

When you apply for a personal loan, lenders look at factors such as your credit score, your income and employment status, and how much debt you’re carrying. Those factors also go into determining the interest rate, loan amount, and loan length available to you. 

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 and has fixed payments that work with your budget, you may find a personal loan right for you.

Recommended: 5 Typical Personal Loan Requirements

The Takeaway

Financing a home addition requires careful planning, but you have several options to help bring your project to life. Whether you choose to use cash, borrow against your home equity, or explore other financing solutions, the right choice depends on your budget, goals, and financial situation. Take time to compare your options, understand the costs, and choose a financing approach that supports your renovation plans.

As you’re planning your home addition, it’s a good idea to shop around for the financing option that makes sense for your project. 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 options from multiple lenders, making it easy to compare personal loan rates and terms.

Ready to build a home addition? Compare personal loan rates with Lantern today!