One primary consideration when planning a home addition or remodeling project is how to finance it. The good news is that your home may have untapped equity you can use to secure financing. In the greater Chicago area (as well as around the country), lenders offer four primary funding vehicles for financing a home addition:
- Unsecured loans
- Mortgage refinancing
- Home equity line of credit (HELOC)
- Construction/renovation loans
Unsecured Home Improvement Financing
These consumer-based loans are typically intended for small to mid-size addition projects and are not tied to your home mortgage. Approval is based on excellent credit ratings and low monthly debt-to-income ratio. Unsecured loans are available up to $55,000 per applicant, and there are two possible repayment programs:
- One year same-as-cash – all interest is forgiven if you pay back the principle within the first 12 months.
- Ten-year installment loan at a fixed rate.
Secured by the current value of your home, these loans are a good choice if you have paid down some of your original mortgage and/or your home has increased in value. In this case, you refinance your existing mortgage into a new primary mortgage that covers the amount of your current loan plus the amount of your project.
Homeowners may borrow up to 80% of their home’s current appraised value (85% with private mortgage insurance). This is a great choice if you are able to match or improve your current interest rate.
- Fixed rates are available for terms of 30, 20, 15, or 10 years.
- Adjustable rates usually have a fixed initial rate for 5, 7, or 10 years; then the rate may be adjusted annually.
Home Equity Line of Credit
For homeowners with relatively good terms on their existing mortgage, a home equity line of credit (HELOC) may be a good option. This loan is separate from your mortgage, but also secured by your home. A HELOC allows you to borrow up to 90 percent of your home’s current appraised value, minus what you owe on your primary loan.
Construction/Renovation Mortgage Financing
The final home addition financing plan we’ll look at is a construction or renovation mortgage. This loan is secured by the anticipated value of your home once the project is completed.
The appraiser is provided project plans and specifications, and you borrow a percentage of the “as-complete” value of your home:
- up to 95%* for loan amounts up to $417,000
- up to 90%* for loans from $417,001 to $625,500
- up to 80% for loans from $625,500 to $1,000,000
The new loan refinances your existing mortgage, as well as renovation costs, which are put in escrow during construction. The contractor is paid from the construction escrow as phases of the project are completed. When the project is finished and the construction monies have been paid out, the loan continues automatically according to the terms set at closing. Fixed and adjustable rate programs are available.
If you would like to learn more about finishing your attic space and how it could work in your home, contact Airoom to schedule a complimentary designer consultation. Or browse the remodeling galleries at Airoom.com.