How Can I Finance a Home Addition?

Last Updated: November 13, 2024

4 min read

Table of contents

Key Points:

If you've lived in your home for several years, refinancing your mortgage could give you cash to finance a home addition.
Taking out a home equity loan allows you to pay it back on your schedule.
Financing your home addition with a credit card, if done responsibly, could earn you cash back rewards and savings on fees.

Deciding when and how to finance a home addition can be complex. Depending on your situation and goals, you have several good options to finance home renovations.

Conventional wisdom implies that you’re saving money on rent by building equity in your home. However, to maintain or improve your home you’ll need to spend money. If you want to add a new bedroom or bath, expand an existing kitchen, add a deck or porch, or otherwise improve your living space, you may want to explore your options for how to finance home additions.

3 ways to finance a home addition

1. Refinance your mortgage

If you’ve lived in your home for a few years, you may qualify for a lower interest rate than when you bought the home. In this case, consider refinancing your mortgage. This can give you a "cash out" option, where you can get a lump sum of cash from your home equity that can be spent on your home addition. Refinancing can also lower your monthly mortgage payment and free up cash to use on a remodel.

ADVANTAGES: Reduce your monthly mortgage payment and use the extra cash each month to pay bills. Use your home equity to take cash out and renovate your home, which may add even more value to your home depending on the renovation and home market. You can also choose to use the cash out to pay bills.

DRAWBACKS: Refinancing your mortgage typically means that you start over from year one of a new 30-year mortgage. This means that it’ll take you many years to pay off the debt from your home addition. For example, with typical mortgage terms, you might end up paying back the cost of the home addition over 30 years. (Unless you set up your refinanced mortgage to have a shorter repayment period, such as 25 years or 15 years, or set up accelerated mortgage payments.)

2. Take out a home equity loan or HELOC

Instead of refinancing your mortgage, you can use a home equity loan or HELOC (home equity line of credit) to borrow against the value of your home equity. Home equity is the value of your home beyond what you owe on your mortgage. If you owe $50,000 on your mortgage, but your home has an appraised value of $125,000, then you have $75,000 in equity.

Rather than paying off your home renovation debt over 30 years, a home equity loan (second mortgage) gives you a separate monthly bill to cover the costs of your home addition. A home equity loan gives you a lump sum amount and a fixed monthly payment.

A HELOC lets homeowners borrow money against your equity as you need it (instead of a lump sum). You only pay interest on what you spend, not the lump sum. As you pay off your balance from your home renovation, you can borrow against it again during your loan term for other home improvements, similar to a credit card.

Did you know?

If you have a low mortgage balance, you can use a home equity loan to refinance your first mortgage. Do this by taking a loan greater than your first mortgage balance, paying off your first mortgage, and taking the difference in cash for your home improvement needs.

ADVANTAGES: There’s no need to redo your mortgage payment schedule, as you would with a refinance. Also, a home equity loan is typically low-interest debt because it’s a secured loan with your home as collateral. Home equity loans may come with low or no fees from your lender. For example, Discover home loans charge $0 application fees, $0 origination fees, $0 appraisal fees, and $0 cash at closing.

DRAWBACKS: You’ll have an additional monthly debt payment to make, so be sure that you can manage the added debt as part of your monthly cash flow. Be careful not to borrow too much money from your home equity. Don’t treat your home equity like a piggy bank because changes in the housing market can change your home value and equity too.

3. Utilize credit cards, strategically

Some home addition costs can be paid for with a credit card, just like any other household expense. If you have a smaller home improvement project, you might need to buy new building materials or pay contractors for their work on your home. Depending on the amounts involved, it might be easier just to put the renovation cost on your credit card and pay off the debt along with your usual monthly expenses.

ADVANTAGES: Using credit cards is simple and quick; there’s no need to go through the process of applying for a home equity loan or mortgage refinancing. If you only need a few thousand dollars for your home repairs or renovation, you might consider putting that expense on your credit card—especially if you can earn credit card rewards.

Some credit cards may offer low introductory APRs, which can allow you additional months to pay off your expenses without owing interest.

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DRAWBACKS: Credit card interest rates are typically higher than home equity loans or mortgage debt because it’s unsecured debt.

When signing up for low APR interest offers, note your introductory period. If you don’t pay off the full amount within the introductory period, you might owe interest on the entire original balance on the card. To avoid interest and fees, you need to read the fine print carefully and make sure to pay off the full balance within the specified promotional period.

Choose the financing option that’s right for your home addition

Improving your home is an investment of time, money, and energy, so make sure you feel comfortable with whatever option you pursue to finance a home addition. There are often several good ways to use the value of your home to get financing, whether by refinancing a mortgage or getting a home equity loan or line of credit.

If you don’t qualify for those options or don’t want to go through the time-consuming process of applying for a refinance or home equity loan, consider paying for your home renovation with a credit card—especially if you get rewards or can qualify for a special low-interest introductory offer on a new credit card.

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