How To Finance Home Addition

[BLOG] Published: 2021-08-29 - Updated: 2023-04-01

How To Finance Home Addition


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How To Finance Home Addition

How to finance home addition is one of the questions any homeowner will have in mind before jotting down a rough plan. Since most of the home addition has a wider scope of work, they require significant funding to complete. However, you shouldn't be scared of the cost of your project as long as it will translate into an improvement of the overall value of your home. 


Whether you are just modifying your current house's footprint to add more livable space for your family needs by expanding your kitchen, adding an extra bathroom, adding a store, or looking forward to boosting your home resale value, adding onto your home is a genius idea. After all, the added new features move your house to another category of houses with higher value. 

However, considering the cost of materials, contractor fee, and the cost of the skilled workforce you need to make your dream come true, home addition always turns out to be a costly affair that many homeowners find difficult to fund from their pocket. 

But, due to the lucrative rewards that come with increasing your home's livable space, you can choose to go ahead with the project even if you do not have enough savings to get the job done by using other alternative sources of fundings such as home equity loan, cash-out equity refinancing, use of credit cards, personal loan, and government loan. 

Before You Begin Here's Is Where To Start 

Before deciding on which funding source to use for your improvement project, the following key steps can help you streamline your project in the right direction. 

Determine the overall cost for your project

Before deciding how to finance your home addition, you should establish the amount of money you need to complete your home addition project. If you're looking to have a precise budget, there's no apparent way you can do it yourself. 

Therefore, you should look for a reputable contractor to craft you a feasible budget for the project. While you can do it the hard way, it's not advisable to assess the project since planning with a flawed budget can greatly impact your project progress.  

At Smart Remodeling LLC, we offer FREE in-home consultation. Additionally, we offer  FREE precise cost estimates for your project based on the prevailing material prices and the underlying trends in the labor market to give you a crystal clear idea of what you're likely to pay for the entire project. Additionally, our experts will advise you on cutting down your home addition cost without cutting corners or compromising the outcome

Assess your current financial capability 

How to finance home addition depends significantly on your current financial capability. Therefore, after establishing exactly the amount of money you need to get your project done, the next step is to assess your available funds and decide how much you can commit to the project from your savings. 

Knowing how much you can get from your saving to finance the project will help you figure out the amount you need from alternative financing options. But, always remember that just because you qualify for a certain loan to finance your home addition project, it doesn't mean it's the most appropriate option for your case. 

Consider the type of addition you're planning for

Typically, home additions come in a wide range of purposes, shapes, sizes, and budgets, significantly affecting choosing a suitable financing option for your project. Whether the project adds extra livable space vertically or horizontally,  the type of addition is a critical factor in streamlining your home addition plans. 

According to Home Advisor, you will have to part with about $46,343 for a typical home addition. However, the cost of most projects ranges between $20,864 and $72,244, depending on the type and quality of the materials you intend to use and the scope of the entire work. 

Depending on the scope of work, your project could fall in any of the following home addition categories.

  • Full addition: Most of the home additions requested by homeowners are full additions. It involves adding extra spaces and rooms, leading to an increase in your home's square footage. Depending on the scope of work, full additions take the longest time and cost more than other home addition types. Such additions involve garage additions and sunroom additions.
  • Micro addition: This type of addition is also known as bump-outs. They extend from the already existing room instead of creating an entirely new room. If you don't need much extra space and have underutilized space, you can always extend or add another room inside a room. This type of addiction is typically not as expensive as full addition. Therefore, you can easily fund it from your savings. 
  • Second Story Addition: If you don't have enough space to build out or utilize the space above your roof, second story addition is the best option to add more space to your house without digging out another foundation. This type of home addition is also inexpensive compared to full additions. Practically, vertical room additions are the best option if you're looking to add extra bedrooms, master suite, or extra bathrooms. 

With the above categories of home additions in mind, you should choose the best option that fits your need and budget. Let's explore various options you can use to fund your project. 

Are You Still Wondering How To Finance Your Home Addition? 7 Options To Consider

Regardless of the type of home addition, there is quite a significant number of funding sources that can help you get the job done. Ready to get started? 

Let's roll in…

  • Cash

Funding your home addition solely using your savings is one of the best ways to get through your home addition project. With this option, you don't have to be worried about high loan interest rates and stressful loan application processes. Even if your savings aren't enough to cover the entire cost, they can help reduce the amount you can borrow to complete your home improvement project. 


  • Home Equity Loan or Home Equity Line of Credit (HELOC)

This home addition financing option allows you to get a lump sum of money that you've gained by paying off your mortgage loan. This is one of the options worth checking out due to the low loan interest rate lower than that of the bank loans. 


If you'd wish to use equity to fund your addition project, you can quickly compute your equity by subtracting your outstanding mortgage loan from your current property value. For instance, if your house is worth $900 000 and you have an outstanding mortgage loan of $300 000, your equity is $600 000. 

While HELOC can be a great option to finance your project, it is important to understand that you can only borrow up to 80% of your equity. So, if your equity is far more than your home improvement budget, HELOC can help you fund the entire project.  

Even though a home equity loan is an option that many homeowners can qualify for, the downside of this option is the time taken to accumulate significantly high equity enough to cover expensive home improvement projects. As such, new homeowners may not find this option practically viable. 

  • Construction Loan

While construction loans were initially meant to finance new home construction projects, this option became very popular for major home improvement projects.  Basically, construction loans are based on the future value of your property after the evaluation of the proposed improvement project. To qualify for this loan, the contractor must be a signatory for the loan. 


While this option is often available to homeowners, it may not be the best funding option for your project for the following reasons:

  • You are forced into refinancing your home at a much higher rate.
  • Higher closing costs, are often based on the mortgage's future value. 
  • Complex and tedious draw process you are subjected to.

Considering the high costs associated with this way of funding your home addition project, you can use this option only as a last resort. 

  • Cash-out refinance

This option involves replacing your mortgage with a higher loan and using the excess to finance your home improvement project. While this sounds pretty good, it also has a downside that may make it impractical for new homeowners. For you to benefit from the cash-out refinance, you must have owned the home for quite a long period and generated significant equity. Believe it or not, many homeowners haven't lived in their homes long enough to accumulate substantial equity. 


  • Opt for a government-sponsored loan

FHA 203k and Fannie Mae Homestyle loans are popular government-sponsored loans for potential homeowners who want to simultaneously buy and carry out home improvements. You can also use this type of loan to refinance your home and include the cost of renovations in your mortgage. 

These two types of loans have a list of qualifications, lengthy and complex application procedures. However, they're a good option for homeowners with low credit scores looking to finance their home addition using either of them. 

  • Personal Loan or Home Improvement 

Personal loans are mostly used for small-scale renovation projects. However, you can also use it for your home addition. Most of these unsecured personal loans are highly marketed for home improvement projects. However, they aren't attractive to some homeowners due to their low borrowing capacity. 

  • Credit cards

Credit cards are a great option for banks that offers discounts, gifts, and other freebies to help you cut back on costs. Hover, it's important to note that credit cards charge higher interest rates than regular bank loans. 


With all the available avenues of "how to finance home addition," you should do your homework right and choose one that works best for your project needs. 

 Start Your Project Today
Are you planning to start your home improvement this season and wondering how to finance home addition? At Smart Remodeling LLC, we have a team of professional home improvement experts who will help you create a feasible project plan based on your budget and project scope. 

With more than a decade of service to the people of Houston and texas at large, we understand financing options that work best based on your project. 

Schedule a free consultation today and get your questions answered. 

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