Home addition loans are financing options designed to help a homeowner pay for adding a new space or room to their existing home. Whether taking on major renovations room by room or upgrading just the kitchen, it’s natural to want to personalize the space and increase its square footage. Many considerations must be kept in mind before starting these projects; however, the first step should always be developing a solid financial strategy.
This article discusses everything you need to know about home addition loans—from their different types to requirements and suitability with your current residence along with an alternative financing option that can give you more borrowing power so you can tackle everything on your wishlist.
What Are the Best Types of Home Additions?
Home additions come in various forms, from kitchen expansions to converting garages into valuable spaces and ADUs or accessible dwelling units. Each type has benefits that improve the property value based on your unique condition.
Here’s a look at the most rewarding types of home additions that have the potential to maximize return on investment (ROI), which reflects how much value the addition adds to the home compared to its cost.
1. Bump Out
A bump out or room addition refers to constructing a single room alongside your property. Depending on its square footage (usually between two and fifteen feet), the room may function as a bedroom or bathroom.
While the price of a bump out is generally cheaper than that of family-sized, conventional additions, they are still quite expensive. This is because adding a single-room structure to your property requires you to pay not only for its foundation but also for permits and inspectors.
2. Garage Conversions
Garage conversions are a popular choice for expanding living spaces at an affordable cost. Garages can be transformed into habitable living rooms, bedrooms, and accessory dwelling units (ADUs) featuring kitchens and bathrooms. The garages’ existing foundation, roof, electricity, and windows make their conversion faster and cheaper.
3. 3 and 4-Season Rooms
3 or 4-season rooms, commonly known as sunrooms, are a great way to add recreational space to your property and improve its overall value. These rooms have wide windows that provide a pleasant view of the outdoor setting while bringing in natural sunlight.
Sunrooms serve as reading rooms, relaxation spots, and dining areas and are typically located on either the side or back of the property. They also don’t require a connection to the HVAC system, making them considerably more affordable than other additions.
4. Second Story Addition
Second-story additions are major home renovation projects that help you expand the living space without expanding the lot size. This type of addition works by building a second structure on top of the existing one.
Building a second level on your property is a major financial project, depending on the floor plan, vision, and zoning requirements. However, it promises an immense boost in the resale value and is great for housing aging parents, renters, and people with mobility issues.
5. Basement Conversions
Converting an incomplete or unused basement into a functional living area is a great idea to expand the square footage without changing the property’s footprint. This home addition can transform the attic or basement into a game room, theater, or extra bedroom to boost the overall value of your estate.
Basement conversions are usually cost-effective since they transform an existing structure. However, factors like ceiling height, insulation, ventilation, and lighting must be considered to ensure that the structure can support the new addition.
6. Accessory Dwelling Units (ADUs)
ADUs are essentially secondary housing units located on the same property as the main residence. This could be a basement apartment, a converted garage, or even a separate tiny home in the backyard.
Not only can ADUs increase property value, but they can also offer the homeowner more flexibility. Since they can serve various purposes, they typically have lower construction costs compared to building a new home or making extensive renovations to the primary home.
How to Pick the Right Home Addition
Regardless of the type of home addition you go for, these major projects require careful planning before you begin execution. To determine which home addition suits you best, take into account factors including:
Consider the Number of Residents
Investing in home additions primarily aims to expand the property’s living space. Consider your family members, future expansion, and whether you plan to live with your aging parents or adult children. Based on the number of occupants, choose between an ADU, single, or multi-room project.
Evaluate the Impact on the Resale Value
A well-planned home addition improves your quality of life and can boost the property’s resale value. Select a home addition project that is sought after by potential homebuyers and will generate an immense return on investment years later.
Explore Funding Options
Since home additions are a hefty investment, it is important to figure out a funding strategy for the project before going ahead with it. Multiple home addition loans let you finance small and large-sized projects according to your needs.
1. Home Equity Loan
As you pay down your mortgage, you build equity in your home, which you can avail of through either a home equity loan or a Home Equity Line of Credit (HELOC). A home equity loan gives you a lump sum, which you pay back through fixed monthly installments.
2. RenoFi Home Equity Loan
RenoFi loans are a specialized financing option designed for homeowners looking to fund major renovations like a home addition. Unlike traditional home equity loans or cash out refinancing, RenoFi loans allow borrowers to access the funds they need based on the value of the home after the renovations are completed instead of its current value. This gives homeowners much more borrowing power than other home addition loan options.
Let’s imagine a scenario where you want to spend $150,000 to renovate your new home and increase the value of your home by $150,000:
Scenario 1 (New Home Purchase):
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Loan Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Here’s a summary of the difference between traditional and RenoFi home loans in table form:
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.
3. Home Equity Line of Credit (HELOC)
A HELOC functions more like a credit card with a fixed or variable interest rate, allowing you to borrow as needed. Both options use your house as collateral and can offer low-cost funds for various needs.
4. RenoFi Home Equity Line of Credit (HELOC)
Unlike traditional loans, RenoFi HELOCs allow you to use your home’s After Renovation Value (ARV), which can 11x your borrowing power.
Scenario 1 (New Home Purchase): Using the same example above of borrowing $150,000 for renovations to increase the value of your home by $150,000:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
RenoFi HELOCs provide a line of credit secured by your current home.
Example RenoFi HELOC Terms:
Years to use credit line: 10 Years
- Interest Only Period: 10 Years
Credit Amount: $195,000
Repayment Term: 15 years
In this example, you’ll have 10 years to use your credit of $195,000. Within those 10 years, just like a credit card, if you borrow against the credit line and pay it back, you will not pay interest.
However, for anything borrowed against your credit, that you do not pay off immediately, you will only pay interest during the first 10 years and then interest and principal after year 10.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Line of Credit Amount:
Example Home Equity Line of Credit % of Home Price: 80%
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
5. Cash-Out Refinance
A cash-out refinance allows you to replace your current mortgage with a new, larger loan. The additional funds from the new loan are provided as cash, which you can use to support your home addition project.
This option relies on having significant equity in your home, which many homeowners may still need. Lenders typically allow you to borrow up to 80% of your home’s current value, which might limit the amount of cash available for your major projects.
Choosing a cash-out refinance also means you might end up with a potentially higher interest rate than before because you will have new loan terms that replace your existing terms.
6. RenoFi Cash-Out Refinance
Similar to other RenoFi products, with a RenoFi Cash Out Refinance, you can receive a larger amount of cash based on the After Renovation Value (ARV) of your home.
Scenario 1 (New Home Purchase): Using the same example above
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Cash Out Refinance Amount)
By writing a loan against your equity in the after-renovation value of your home, RenoFi allows you to borrow funds for renovation against $750,000 versus $600,000. This increases your loan amount from $0 to $195,000, allowing you to borrow infinitely more than a traditional Cash Out Refinance for renovations.
This allows you to receive the $150,000 you were looking for with house renovations and even offer $45,000 above what you were asking for in case you needed more money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
Example Home Equity Loan % of Home Price: 80%
Example Home Equity Loan Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $420,000 = $255,000 (RenoFi Cash Out Refinance Amount)
Using a RenoFi Cash Out Refinance, you have increased your loan amount from $60,000 to $255,000 because the RenoFi loan is written against the assessed after renovation value (ARV) of $750,000.
Again in this scenario, using RenoFi you are able to borrow significantly more than traditional loan options and borrow the $150,000 you are looking for to make your renovations and even have the option to receive $105,000 on top of the $150,000.
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
7. Construction Loan
Construction loans are designed to fund new home builds but can also fund significant renovations on an existing property. The funds are paid out in increments over the construction and renovation process.
These loans may force homeowners to refinance, often at a higher rate than their current mortgage, which could lead to increased monthly payments.
Construction loans are usually also a short-term option (between 6 and 12 months) and may require that the homeowner repay the loan once the project is completed. This means more permanent financing may need to be secured afterward, which is where those higher rates may come into the picture.
If you are looking for help with a construction loan, the Renofi Marketplace offers construction loans through lending partners to help you find lenders for your property.
How to Choose the Right Home Addition Loan
While each loan type has perks, some may work better. Considering these factors can help you determine which option best suits you.
Fixed vs. Variable Rates
Home improvement loans have either fixed or variable rates. Fixed-rate loans offer stability with consistent payments, though they may have a higher upfront cost. Variable rates can change over time, potentially leading to lower initial costs but with some risk.
Select the option based on how easily you can manage rate changes and how it fits your budget and project timeline.
Repayment Options
Most home loans come with terms of up to 30 years, offering the advantage of lower monthly payments. Personal loans, with their shorter terms, may result in higher monthly payments. Selecting the appropriate repayment term can help secure the best rate and manage overall loan costs effectively.
Project Size
The scale of your project plays a significant role in determining your loan options. Consider both the scope and the expenses involved. Personal or home equity loans are usually suitable for a single project with a defined budget.
However, a revolving credit source like a HELOC might be more beneficial if you’re tackling multiple projects with variable costs.
Approval Criteria
Before applying for a home addition loan, consider approval requirements, such as your income, debt-to-income ratio, and credit history. Excellent credit and a strong income are key to getting the best rates.
Fees
Be mindful of fees like application or origination charges, which can add to your loan’s cost. While high fees can add up, the APR provides a clearer picture of the loan’s price. A loan with high fees might still offer a competitive APR, so checking the APR helps ensure you’re getting the best overall deal.
Conclusion
Home addition loans allow homeowners to enhance their living space and, ultimately, their quality of life. These loans offer the financing needed for these larger renovation projects and let homeowners tailor their homes to meet their needs.
One way to bring your property vision to life is through RenoFi loans. With RenoFi, you can find favorable rates and high borrowing limits for all home projects.
RenoFi loans are a smart way to finance your home renovations. In contrast to conventional loans, which are focused on your current home value or require you to refinance your permanent mortgage, RenoFi loans are based on your home’s after-renovation value.
This allows you to borrow, on average, 11 times more, make a low monthly payment, and stick with the low rate on your first mortgage. If you want to expand your space, RenoFi is the smartest choice! Discover how RenoFi can help you achieve your renovation goals.
