How To Finance An Addition To Your Home

A comprehensive guide to budgeting, financing, and maximizing the value of your house addition renovation project.

There are so many benefits to adding on to your existing square footage. But we’ll be honest, of all the home improvement projects out there, nothing is more complicated or expensive than building an addition. And that’s why choosing the right financing option is a super important decision.

So we created this comprehensive guide that will walk you through all the loan options available to help you understand which home addition finance option is right for your project.

If you’re ready to increase the size of your property but are still unsure of the best way to finance your addition, you’re in the right place.

Building onto an existing space to create your own dream home can both drastically increase the value of your property and add the extra square footage it’s currently missing.

Having said that, the cost of an addition undoubtedly makes it a large financial commitment and so choosing the right financing option is an important decision.

A quick search will have no doubt thrown up plenty of different ways to finance your project and we’re the first to admit that getting your head around the differences between them all can be confusing.

From a RenoFi Loan to a traditional home equity loan, a personal loan, a construction loan, and more— in this article we take you step-by-step through the different financing options so that you can clearly map out which is the best route to help you borrow the money you need.

But just remember; just because you can use a certain type of loan to pay for an addition, it doesn’t mean it’s going to be the right choice for you. And we’ll break down the pros and cons of six different options to help you to determine which route you should go down.

Just remember that making the wrong choice can increase your monthly payments, limit your borrowing power or both.

Here’s what you’ll learn and everything that we’ll explore:

House Additions: Costs, Financing, and Expert Advice

Adding onto your existing space to create your own dream home can both drastically increase the value of your property by increasing your home’s livable square footage. Whether it’s to accommodate your growing family or adapt to your changing needs, an addition can offer an incredible ROI both financially and functionally.

But knowing how to finance an addition can be tricky. A quick search will undoubtedly generate several ways to cover the costs of your project, and we know getting your head around the differences between them all can be very confusing. And making the wrong choice can increase your monthly payments and limit your borrowing power.

From a RenoFi Loan to a traditional home equity loan, a personal loan, a construction loan, and more, we’ll take you step-by-step through the different financing options available. And for newer homeowners, we’ll also cover how to finance a home addition without equity, so that you can determine the best route to help you borrow the money you need to cover your home addition costs.

Types of House Additions

A home addition is any project that increases its total living area — either horizontally or vertically. They come in all shapes, sizes, budgets, and purposes, which will all undoubtedly play a factor when deciding how to finance a home addition in the best way for you.

According to HomeAdvisor, the average cost to build an addition or adding a room to your home is $46,343, with most projects coming in between $20,864 and $72,244 depending on the scope and specifications.

Below are three of the most common types of home addition:

Full Addition

The most typical of home additions are full or traditional. These are extra rooms and spaces added to the property, which expand the square footage. Depending on the scale of work, these also take the longest to complete and usually cost the most. This type of project also includes the likes of sunroom and garage additions.

Micro Addition

Rather than creating an entirely new room, micro additions, otherwise known as bump-out additions, extend from existing rooms. Therefore, they provide a simpler and cheaper option for those who don’t feel like they need as much extra space.

Second Story Addition

When building outwards isn’t available to you, a second story addition could be the best choice for creating more space. Perhaps the plot size your home stands on isn’t big enough, or you don’t want to sacrifice the yard space. It’s also worth noting that building up is often somewhat cheaper than adding on.

In many cases, building vertically can provide the ideal solution for additional bedrooms or bathrooms or even a master suite.

Room Additions

Whether it’s adding an in-law suite or new home office, a very common type of home addition is building a single room structure onto the side of the home. These additions are typically designed for a single function — like a bedroom, bathroom, or hobby room.

Second-story Additions

When land is at a premium, a second-story addition can help homeowners significantly increase their living space without expanding the property’s footprint. These additions often double the amount of floor space (unless only a partial addition), and can significantly improve a home’s resale value. But these additions are also a major undertaking, usually requiring homeowners to live elsewhere during construction.

Bump-out Additions

Bump outs increase the layout of a specific room, such as expanding a kitchen to add an eat-in space or making a basement larger to accommodate more storage. It may only be an additional 50 square feet to add a walk-in shower to your Master bathroom. Since these additions are typically smaller, they usually tend to be less expensive.

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Sunroom or Conservatory Additions

A sunroom is usually a supplemental living space that is typically separated from the main part of the house. Designed to allow for a lot of natural light and often utilizing pre-fabricated materials, these spaces are extremely versatile — great for relaxation or indoor gardening.

Garage Conversions

A garage conversion transforms one- or two-vehicle attached garage into a finished, functional living space. This is done by adding flooring, installing a ceiling and installation, and replacing the garage door with a solid wall. In many cases, these spaces are used for in-law suites, but with a private entrance, it is also great for rental purposes.

Things To Considerations With House Additions

Before you make any concrete decisions regarding your home addition, you’ll want to make sure you’ve considered everything. So while you’re busy creating your wish-list and researching loan options, here are a few things you’ll also need to know.

Obtaining Permits. Every city and state will require their own permits for home addition projects with various rules and guidelines to obtain them. While your contractor will likely handle that part of the process for you, it helps to understand what you need as a checks and balances. You will also be the one paying for them, so the more you know, the better you can budget.

Working with Architects/Designers. While it’s not required to use an architect or professional designer to build an addition, it could offer some major benefits. A designer will help you ensure cohesion from your current home to your new space, while offering helpful recommendations and material alternatives that look great and save cost. An architect can help you make critical decisions regarding the functionality of your space and how to best add value to your new space in ways you may not have considered.

Coordinating with Contractors. You and your contractor have to be on the same page in order for your working relationship to actually work. Every contractor will have their own communication style, so make sure it meets your needs. Ask who will be your daily point-of-contact, and determine project milestones ahead of time. Make sure everything is laid out and clearly identified in your contract, so there’s no discrepancies later on.

Structural feasibility. Consult your contractor (or 2-3) and invite them to come out and inspect your space. You’ll want to make sure that the visions you have for your addition are actually possible, and if they are, what kind of work and cost you’re getting into. There may be some laid bearing walls you simply can’t remove or areas without plumbing or electric that will require more specialty subcontractors to complete.

Functional and design considerations. Do your own research online to see what you like and explore different designs with a professional so you know your options and what’s possible. Try not to stray too far from your current home design and decor, so that the space feels more connected. While you want the addition to meet your needs, cohesion is important to ensure a seamless design that complements the spaces in your home that you already love.

3 Reasons Why A Home Addition Is A Great Idea

Your family may have outgrown your home, but you don’t want to move.

Maybe you have been promising yourself that dream kitchen for a while now. Maybe you want to create the space that each person in your family needs as your children grow into young adults.

Everyone has a different motivation for creating an addition to their home, but what are the main benefits of building onto your existing property?

1. Extra Living Space

One of the most common motivations for a home addition is simply to enjoy extra living space that can be tailored to personal needs. Unsurprisingly, increasing square footage is at the top of homeowners’ renovation wishlists.

2. Stay In The Neighborhood You Love

Not only can a home addition be cheaper and easier than moving, but perhaps you worry that finding another property in your desired area might be challenging given the housing stock shortage that we find ourselves in the midst of right now. Adding extra space to your existing property saves the disruption of uprooting from friends, neighbors, schools, and the amenities you currently enjoy in your current location.

3. Increase Your Home’s Value

While it is not always guaranteed, typically an addition to your home is going to be a financial investment that increases the overall value of the property. Even if you are not planning to move for a considerable amount of time, an impressive addition will add curb appeal if you do want to sell in the future.

Home Addition Costs in 2023

So how much does a home addition cost? According to HomeAdvisor, the average cost of a home addition or adding a room to your home is $46,343, with most projects coming in between $22,215 and $81,369 depending on the scope and specifications.

  • Home office: $18,000 to $35,000. If you also want it to serve as a spare bedroom, it needs to be at least 70 square feet, have a window, and a closet
  • Master bedroom: $25,000 to $100,000
  • Bathroom: $20,000 to $60,000. Although it is one of the most expensive rooms to add, it can increase resale value by more than 50%
  • Kitchen: Average of approx. $65,000. Gourmet kitchens with high-end appliances can reach $125,000+
  • Second story: $100 to $500 per square foot, especially if a roof replacement is involved.

When determining how to pay for a home addition, you’re going to be faced with a number of different options, but they each come with their own advantages and disadvantages. So it’s important to have all the information possible and understand the differences.

Making the Best Decision for Your Home Additions

Regardless of the size and scope of your home addition, you want to finance it in the smartest way possible. We cannot stress enough the importance of taking the time to fully understand the different options that are available to you and to know the pros and cons of each. And this means asking yourself the following questions:

  • How much is your addition going to cost?
  • How much equity do you have in your home?
  • What’s your credit score and credit history?
  • Do you have any other debt on other loans and credit cards?
  • What is the maximum monthly payment you can afford?
  • How long do you want to repay the loan over?
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When you have the answers, contact RenoFi for next steps. We can help you determine if one of our renovation loans is right for you. We can also connect you with local contractors and lenders within our extensive network so you can rest assured you’re getting the highest quality for the lowest rates.

Check out our awesome monthly payment calculator to see instantly how RenoFi loans increase the amount you can borrow and what those rates may look for you. And for more smart tips and information on getting the most ROI out of your new home additions as possible, contact RenoFi today.

Below is a list of the various financing options available and the most important qualities of each.

6 Ways To Finance A Home Addition

You’re going to be faced with a number of different options, but they each come with their own advantages and disadvantages.

Take the time to understand the differences between these six different ways to finance your addition and carefully consider which can help you to borrow all of the money you need with the lowest monthly payments.

A RenoFi Loan

RenoFi Loans are a new type of home renovation loan that provide the perfect way to finance a home addition by stretching your borrowing power even further. Unlike traditional home equity loans, RenoFi Loans factor in what your home will be worth after the work has been completed, as a result, increasing your borrowing power by 11x as you can see in the example below:

This makes a RenoFi Loan a great option for recent homeowners who haven’t built up enough tappable equity to take out a home equity loan or home equity line of credit but are nonetheless desperate to get started on the addition.

Considering that increasing the value of your property is often one of the main benefits of carrying out a home addition, this will give you more money to play with to create your dream home, without having to compromise unnecessarily and reduce the scope of your project.

How much more could you expect to borrow with a RenoFi Loan?

Let’s say your home is worth $500,000 right now and you currently have a mortgage of $350,000. With a typical home equity loan, you might expect to borrow around $50,000. But the planned addition to your home will take the value after the project is completed up to $750,000.

A RenoFi Loan, in this example, could let you borrow up to $350,000. That’s a huge increase in your borrowing power.

With terms up to 20 years and your loan based on the after renovation value, a RenoFi Loan allows you to take advantage of lower market rates compared to the higher interest rates of many of the alternatives.

If you already have a great rate locked in on your first mortgage, you’ll be relieved to hear that no refinancing is required. This is a second mortgage that’s perfectly suited to this type of project, which means you can keep your low rates and don’t have to start the clock again on your mortgage.

Put simply, for most homeowners, a RenoFi Loan offers the most money and lowest monthly payment and unlike some of the alternatives, there aren’t any inspections, contractor involvement, or draws to contend with.

Here’s how these loans stack up against some of the other options that you’re probably considering:

Here are the need-to-know details:

  • Loan amounts from $20k to $500k
  • Low fixed interest rates like traditional home equity loans
  • Repayment terms up to 20 years
  • Ability to borrow up to 90% of the after renovation value
  • The full loan amount available at closing

If you are curious to find out if this type of loan is right for you, why not speak to one of our advisors, or try out the RenoFi Loan Calculator to discover how much you could borrow.

A Home Equity Loan or Line of Credit (HELOC)

A home equity loan or line of credit (HELOC) allows you to tap into any equity you have already amassed through paying off your mortgage to release a lump sum that can then be used to pay for your addition.

You can quickly work out the amount of equity that’s in your home by simply deducting what you owe on your mortgage from the current value of your property. A property that’s worth $600k that has $400k outstanding on the mortgage has $200k equity.

You need to understand though that a typical home equity loan will only allow you to borrow up to 80% of the home’s value, meaning that if your property is worth $500k right now and your outstanding mortgage balance is $350k, the most you’ll be able to borrow is $50k.

But for many homeowners, there’s one huge problem with these loans, and the biggest downside is that if you haven’t owned your home for very long, chances are that you may not have accumulated much equity.

Just take a look at how long it can take to build up $100k equity:

Financing a home addition can be incredibly costly and often needs a large injection of cash and the reality is that those who have only recently bought their property and who haven’t yet got sufficient tappable equity, this isn’t going to be an option.

And even those who have equity available will find that an alternative such as a RenoFi Loan allows them to maximize their borrowing power and not feel any pressure to reduce the scope of their project, knowing that there’s a way to borrow all of the money that’s needed at the best possible rate.

Many homeowners don’t want to wait the many years it can take to build up enough equity, or have to compromise on the scope of the renovations, which often happens. We don’t think this is fair, and is one of the reasons why RenoFi was launched.

A home equity loan or home equity line of credit might be suitable financing options for some smaller projects for homeowners who have lived in their home for many years, but for most, they’re limiting.

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A Cash-Out Refinance

A cash-out refinance involves refinancing your mortgage. By replacing your existing mortgage with a loan for a higher amount, you are then free to use the excess money to finance your home addition project.

But yet again, the issue with this option to finance an addition to your home is that it requires you to have generated significant equity in your property. Equity that many homeowners haven’t built up.

That said, even if this is the case and you have lived in your home for many years, the amount that can be released with a cash-out refinance is often capped by lenders at 80% of your home’s current value, again offering far less borrowing power in comparison to a RenoFi Loan.

A Construction Loan

Construction loans were originally created to fund new home builds, but are also a popular method for financing major home renovations. Construction loans are based on the future value of your home after the proposed renovation or construction project, and combine a traditional mortgage with an added loan to fund improvements.

As far as we’re concerned, there are three big reasons you shouldn’t use a construction loan for any renovation, and that includes financing an addition. The first of these is that you are forced to refinance your home, often onto a much higher rate than you’re currently on and, as a result, you could end up paying higher monthly payments in the process.

Secondly, because of the need to refinance for this type of loan, the closing costs you pay are higher, as they are based on the new value of your mortgage as well as your home addition budget, rather than just the renovations on their own.

If that wasn’t enough, lastly, the lenders’ fees on construction loans are usually higher than any other type of loan, and that’s not to mention the complex draw process that you’ll need to go through.

There are better ways to finance your addition.

An FHA 203k or Fannie Mae HomeStyle Loan

FHA 203k or Fannie Mae Homestyle loans are two very similar government-sponsored loans that are often used by potential homebuyers who want to simultaneously finance the cost of buying a new home, alongside releasing cash to make improvements. They can also be used to refinance an existing home and add renovation costs to your mortgage.

These loans let you borrow against the predicted value of your home after work has finished in the same way that a RenoFi Loan does, therefore increasing your borrowing power. But the complexities of trying to take out one of these types of loans may leave your head spinning and put many people off.

The process is far from straightforward. There is a long list of qualifying criteria, and the steps for both an FHA 203k or Fannie Mae HomeStyle loan can be lengthy and complicated, however given their lower credit score requirement than other options, they’re sometimes the only financing method available to someone with a poor credit history that is looking to borrow based on their home’s after renovation value.

Take a look at our FHA 203k loans vs Fannie Mae HomeStyle loans guide to learn more.

A Personal Loan / Home Improvement Loan

You’ve probably come across home improvement loans and seen these recommended as a great way to finance an addition. But what you’re probably not aware of is that these are commonly unsecured personal loans that are marketed at those who are looking for a way to finance a home improvement project.

For most homeowners, neither personal loans or home improvement loans (or credit cards, which it’s worth mentioning here as they’re sometimes used to pay for smaller home improvement projects) are going to be the best way to finance an addition for two reasons: limited borrowing power and a high interest rate.

Of course, a higher interest rate means higher monthly payments and it’s worth noting that these can often be somewhere between 8% and 15%. On credit cards, this will usually be even higher.

A personal loan will also typically have far shorter repayment terms than other loan options, further increasing your monthly payments .

That said, because of the quick and simple application process and the ease to obtain, personal loans can be tempting for lower-cost projects that other options wouldn’t be suited to, despite not being the best financing option for most homeowners looking to finance an addition.

What’s The Best Way To Finance An Addition?

We believe that, for most homeowners at least, the most appealing way to finance an addition to your home is through a RenoFi Loan, given that it combines all the best features of other loans on the market.

They are the only home addition financing option to include all of the following benefits:

  1. A loan based on the after renovation value
  2. The potential to borrow up to 90% of the after renovation value of your home
  3. No refinancing required
  4. No inspections and draws needed

Just because you haven’t built up sufficient tappable equity to get a home equity loan or line of credit, it doesn’t mean you should be forced to reduce the scope of your project. And with other options available, you don’t have to.

But we cannot stress enough the importance of taking the time to fully understand the different financing options that are available to you and to know the pros and cons of each.

And this means asking yourself the following questions so that you can determine which route to go down:

  • How much is your addition going to cost?
  • How much equity do you have in your home?
  • What’s your credit score and credit history?
  • Do you have any other debt on other loans and credit cards?
  • What is the maximum monthly payment you can afford?
  • How long do you want to repay the loan over?

Home Addition Financing FAQs

Below you’ll find answers to some of the most common questions that homeowners have when considering different financing options for their addition.

If you would like to leverage maximum borrowing power while still taking advantage of the lowest interest rates and monthly payments, then we’d love to chat with you further about a RenoFi Loan.