Financing a home addition in Chicago can be a daunting task, but it doesn’t have to be. With the right plan and the right lender, you can easily add the extra space you need to your home without breaking the bank. One thing to remember is that in many cases, banks will require you to have a licensed contractor for your home addition.
The 5 Best Ways To Finance A Home Addition
1. Home Equity Loan
A home equity loan allows you to borrow against the equity in your home. This means that you can use the value of your home to secure a loan for your home addition. This is often a good option for homeowners who have a lot of equity in their home and a good credit score.
There are many banks that offer home equity loans, and the best one for you will depend on your individual circumstances and needs. Some of the factors to consider when choosing a bank for a home equity loan include the interest rate, fees, customer service, and reputation. Some banks that are known for offering competitive rates and good customer service include Wells Fargo, Bank of America, and Chase. However, you should compare the terms and conditions offered by different banks and credit unions before making a decision. It is also important to consult with a financial advisor before taking out a home equity loan.
2. Home Equity Line of Credit (HELOC)
A HELOC works similar to a home equity loan, but instead of receiving a lump sum at closing, you are approved for a line of credit that you can draw on as needed. This is a great option for homeowners who need flexibility in how they use the funds for their home addition.
Some other benefits of a HELOC are;
- Low interest rates: Because a HELOC is secured by the homeowner’s equity in their property, the interest rates on these loans are generally lower than those on unsecured loans, such as credit cards or personal loans.
- Tax deductions: Interest paid on a HELOC may be tax-deductible, which can help to lower the overall cost of borrowing.
- Flexibility: A HELOC is a revolving line of credit, which means that homeowners can borrow against it as needed and pay it back as they can. This can be useful for homeowners who have irregular income or unexpected expenses.
- Credit building: A HELOC can also be a good way for homeowners to build credit, as long as they make their payments on time and keep their balances low.
The great thing is that you can draw the money at the pace of the construction if you addition has a particularly long timeline.
3. FHA 203(k) Loan
This type of loan is specifically for home renovations and additions. It allows you to borrow the funds for the addition and any necessary repairs in one loan. This can be a great option for homeowners who have a lower credit score or a limited amount of equity in their home.
To obtain a FHA 203(k) loan, you will need to follow these steps:
- Find an FHA-approved lender: Look for a lender that specializes in FHA 203(k) loans.
- Meet the credit and income requirements: You will need to have a good credit score and a steady income to qualify for the loan.
- Find a property: You will need to find a property that meets the FHA’s requirements for a 203(k) loan.
- Get a property appraisal: The property will need to be appraised to determine its value and ensure that it meets the FHA’s requirements.
- Submit a loan application: Once you have found a property and had it appraised, you will need to submit a loan application to the lender.
- Wait for loan approval: The lender will review your application and determine if you are eligible for the loan.
- Close on the loan: Once your loan is approved, you will need to close on the loan and complete the purchase of the property.
Note that FHA 203(k) loans are intended for properties that need rehabilitation and require the borrower to hire a licensed contractor to do the work and submit the work plans and cost estimates to the lender.
4. Personal Loan
A personal loan can be used for a variety of expenses, including home additions. This type of loan is not secured by your home and can be obtained from a variety of lenders, including banks and online lenders. This is a good option for homeowners who don’t want to put their home at risk and have a good credit score.
5. Construction Loan
A construction loan is a short-term loan that is specifically designed for building projects. This type of loan is used to pay for the cost of construction and is typically paid back once the project is complete. This can be a good option for homeowners who want to build an addition from scratch and have a good credit score.
When choosing the best way to finance your home addition, it is important to consider your credit score, the amount of equity in your home, and your overall financial situation. It’s a good idea to shop around and compare rates and terms from different lenders before making a decision.
In any case, it is always important to consult with a financial advisor or a mortgage expert before making any financial decision. Lastly, if you are in need of a home remodeling contractor in the Chicagoland area, EcoBuild+ can guide you through the entire process.