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How Can I Finance a Home Addition?

Last Updated: December 20, 2023
4 min read

Key points about: how to finance a home addition

  1. If you've lived in your home for several years, refinancing your mortgage could give you cash to finance a home addition.

  2. Taking out a home equity loan allows you to pay it back on your schedule.

  3. Financing your home addition with a credit card, if done responsibly, could earn you cash back rewards and savings on fees.

Deciding when and how to finance a home addition can be complex—yet, depending on your situation and goals, there are several good options.

Conventional wisdom implies that you’re “saving money” on rent by building equity in your home, but in reality, you often have to spend money to maintain or improve the home you own. If you want to add a new bedroom or bath, expand an existing kitchen, add a deck or porch, or otherwise improve your living space, you may want to explore your options for how to finance a home addition.

Consider these options for financing a home addition, and pay special attention to both the advantages and drawbacks of each:

3 ways to finance a home addition

Refinance your mortgage

If you have already lived in your home for a few years and may qualify for a lower interest rate than when you bought the home, you may want to consider refinancing your mortgage. This can either give you a “cash out” option, where you can get a lump sum of cash from your home equity that can be spent on your home addition, or you can free up some extra money each month by having a lower monthly mortgage payment from your refinancing.

ADVANTAGES: Reduce your monthly mortgage payment and use the extra cash each month to pay bills. Use your home equity to take cash-out and use the cash-out to renovate your home and possibly increase its value or pay bills.

DRAWBACKS: Refinancing your mortgage typically means that you start over from year one of a new 30-year mortgage. This means that it’ll take you many years to pay off the debt from your home addition. For example, with typical mortgage terms, you might end up paying back the cost of the home addition over 30 years. (Unless you set up your refinanced mortgage to have a shorter repayment period, such as 25 years or 15 years, or set up accelerated mortgage payments.)

2. Take out a home equity loan

Instead of refinancing your mortgage, you can use a home equity loan to borrow against the value of your home equity. Rather than paying off your home renovation debt over 30 years, a home equity loan gives you a separate monthly bill to cover the costs of your home addition.

Did you know

If you have a lower first mortgage balance, you can use a home equity loan to refinance your first mortgage rather than taking a second loan. This can be accomplished by taking a loan greater than your first mortgage balance, paying off your first mortgage, and taking the difference in cash for your home improvement needs.

ADVANTAGES: There’s no need to redo your mortgage payment schedule, as you would with a refinance. Also, a home equity loan is typically low-interest debt because it’s secured by your home. Home equity loans may come with low or no fees. For example, Discover home loans charge $0 application fees, $0 origination fees, $0 appraisal fees, and $0 cash at closing.

DRAWBACKS: You’ll have an additional monthly debt payment to make, so be sure that you can handle the added debt as part of your monthly cash flow. Be careful not to borrow too much money from your home equity. Don’t treat your home equity like a piggy bank.

3. Utilize credit cards, strategically

Some home addition costs can be paid for with a credit card, just like any other household expense. If you need to buy new building materials or pay contractors for their work on your home, depending on the amounts involved, it might be easier just to put those bills on your credit card and pay off the debt along with your usual monthly expenses.

ADVANTAGES: Using credit cards is simple and quick; there’s no need to go through the process of applying for a home equity loan or mortgage refinancing. If you only need a few thousand dollars for your home repairs or renovation, you might consider putting that expense on your credit card—especially if you can earn credit card rewards. Some credit cards may offer  low introductory APRs, which can allow you additional months to pay off your expenses without owing interest.

DRAWBACKS: Credit card interest rates are typically higher than home equity loans or mortgage debt since it’s unsecured debt. Also, be careful when signing up for low APR interest offers—if you don’t pay off the full amount within the introductory period, in some cases, you can owe interest on the entire original balance on the card. Promotional low interest credit cards can be a great deal, but, to avoid interest and fees, you need to read the fine print carefully and make sure to pay off the full balance within the specified promotional time period.

Choose the financing option that’s right for your home addition

Improving your home is an investment of time, money, and energy, so make sure you feel comfortable with whatever option you pursue to finance a home addition. There are often several good ways to use the value of your home to get financing, whether by refinancing a mortgage or getting a home equity loan or line of credit.

If you don’t qualify for those options or don’t want to go through the time-consuming process of applying for a refinance or home equity loan, consider paying for your home renovation with a credit card—especially if you get rewards or can qualify for a special low-interest introductory offer on a new credit card.

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