As much as many people want to have a home addition project, there are is always the money issue as many don’t know how to finance the project. Are you wondering how do you finance a home addition? There are plenty of options you can go with. They include:
The cash-out refinance option is a highly popular financing option when you are building home addition. How it works is that you refinance a new mortgage loan with a bigger balance than the one you currently owe, then you pay off your existing mortgage and keep the remaining cash.
The money you receive from the cash-out refinance comes from the home equity, and you can use it to fund your home improvement projects.
This option works perfectly when you can reset your loan at a lower interest rate than your current mortgage meaning that you can easily adjust the loan term and you even complete paying your home sooner than projected.
To tell whether this financing option is for you, compare the costs over the life of the loan, including the closing costs. This calls for you to look at the total costs of the new loan and compare them to the current loan costs.
As you are making the comparisons, keep in mind that the cash-out refinances tend to have higher closing costs that apply to the entire loan amount—not just the cash out. Due to this, you need to take your time and find an interest rate significantly lower than the current one.
Pros of this option
- You will continue paying one mortgage payment
- You can spend the cash you get on anything
- The cash out comes from the home equity
- You can lower your long term and your interest rate at any time
Cons of this option
- The new loan tends to have a larger balance than your current mortgage
- When you refinance, you start the loan over
- The closing costs apply to a large loan amount
Home equity loan
Also known as a second mortgage, the home equity loan allows you to borrow against the equity you have built up in your home. When you visit the lender, he calculates the equity by assessing the value of your home and subtracting the outstanding balance due to the existing loan.
You should note that unlike the cash-out refinance, the home equity doesn’t pay off your existing mortgage, so if you already have a mortgage, you will continue making the monthly payments and at the same time make the payments of the new home equity loan.
This loan makes sense if you have plenty of home equity built up or need funds for a big, one-time project.
After approval, the loan is dispersed as a single payment, and your home is used as collateral, and due to this, you attract lower interest rates.
Home equity loan pros
- It’s long term where it can last for up to 30 years
- It has fixed interest rates
- You can borrow up to 100% of your equity
- Perfect for large projects such as remodels
Home equity loan cons
- If you already owe money to the lender, you add a second monthly mortgage payment that can dig a hole in your pocket.
- It comes with plenty of origination fees.
- You are given one large payment, so you need to be cautious when planning your home addition project.
Which is the best home remodelling financing option?
To settle on the best option, you need to have a sitting with your lender and home addition companies Washington DC and weigh the pros and cons of each.