If you’ve been living in the home for a few years, you probably have more shares in it that can be used to pay for the addition. Depending on the cost of the add-on, you may make monthly installments on your new loan that are very close to the amount you may be paying now due to the expansion of the term or a reduction in interest rates due to market conditions. Furthermore, if the addition is meaningful, a lender can give you a loan based on the value of your home after the addition.
Another way you can use the shares built up in your home is by taking a second mortgage, rather than refinancing your original loan. The advance cost of a second mortgage may be lower than you pay for refinancing, but be aware that interest rates are usually higher, and the loan period may be shorter.
Rather than a lump sum loan, you can use the shares built in your home to arrange a line of credit. Once you have been approved for a HELOC, you will receive a checkbook from your lender, so you can pay for the addition if work is completed. Since you have received a line of credit rather than a loan, you will save money simply by paying interest on the amount you have withdrawn. However, most HELOCs have a variable interest rate, so in your decision, consider how you will pay for your addition.
You can get an unsecured personal loan or line of credit for virtually no up-front fees but the interest is higher than when you insure a loan or line through your home. Furthermore, the interest on a personal loan or line of credit is not tax deductible while it is, usually, when it is secured by a home. This method is most typically used for additions when the project is small and the borrower finds it easy to repay the loan in a short period of time.
You want to risk not having enough money to complete remodeling your home. It is important to get approval for any type of loan you want before getting a remodeling contract. It’s also a great way to get the amount you can afford so you’ll have fewer surprises when it’s time to pay the bills. As there are always extras that homeowners don’t expect, it’s a good rule to add 10 percent to everything you’d expect the remodeling to cost.