From Guest Author on February 9th, 2011 in Home Additions
Building an addition to your home benefits you in two distinct ways: it gives you and your family more room to sprawl, and in most cases, it significantly increases your home’s resale value. There are a number of cost-efficient financing options to consider—including the most prominent ones below.
To sketch out your plan with a contractor directly, click here.
1. Home Equity Loan
Home equity loans are second mortgages that let you harness the power of the equity you’ve built up in your home. This type of financing option is especially attractive to many because:
- You typically get a lower interest rate. This is because your established equity and the home itself serve as collateral—as opposed to using an unsecured loan with a ridiculously high interest rate.
- You receive the entire amount of money asked for upfront, which is especially beneficial since many—if not most—contractors require some upfront payment before they start working.
A quick caveat, though: although the interest will probably be higher than it initially was with your first mortgage, this time you pay NO closing costs.
2. Use Your Home’s Equity for a Line of Credit
Commonly known to lenders as HELOCs, a home equity line of credit lets you borrow in phases and as needed. Contrary to using a significant portion of your equity with a home equity loan, HELOCs allow you to borrow money for home improvement on a need-to basis—especially beneficial for DIY jobs. This type of equity loan:
- Is typically issued by a bank or lender in the form of a checkbook or credit card, good for either paying contractors for labor and/or supplies as needed, or for purchasing home improvement materials at the local hardware store.
- Usually comes with an adjustable rate, and depending on the terms, lets you pay on the interest only for a length of time.
3. Refinance Your Mortgage
This option is generally for those who’ve lived in their home for a few years and/or have established significant equity. A mortgage refinance package lets you:
- Refinance your original mortgage for more money than your current amount of equity.
- Use the difference in your current equity and the amount loaned. Depending on the lender’s terms, you may even be able to modify your loan and extend the term length.
4. Use a Personal Loan
A personal loan or personal line of credit is generally for smaller home remodeling and renovation projects. Personal loans have lower associated charges, but it’s good to keep in mind that since these types of loans do not use your home as collateral, they’ll often carry higher rates than equity-based loans. Another potential downfall is that while the above-mentioned loan types are generally tax-deductible, personal loans/lines of credit are not.
A word to the wise: if you are using a contractor, do not disclose the full amount of the loan you’ve received. Why? Because when unexpected costs come up during the construction phase—and they almost always do—you’ll want to have that extra 10-15% to back you up.
Trust the contractors at CalFinder to help you find quality financing at the lowest possible interest rates. Get in touch with us today.