The decision to add on to your home is often followed quickly by a second question: how do I pay for it? Here's a straightforward overview of the financing options available to Idaho homeowners for room additions and major remodels.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured by the equity in your home. You draw on it as needed during construction and repay on a schedule set by your lender. HELOCs are well-suited to renovation projects because you can draw funds in stages rather than all at once.
The interest rate on a HELOC is variable and tied to the prime rate. In the current rate environment, HELOCs carry meaningful interest costs. The approval process is relatively fast compared to a construction loan -- typically 2 to 4 weeks.
For room additions in the $80,000 to $150,000 range where the homeowner has sufficient equity, a HELOC is often the most practical financing option.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger mortgage and provides the difference in cash. This is useful if your home has appreciated significantly and current mortgage rates are close to your existing rate.
In a higher interest rate environment, a cash-out refinance may increase your monthly payment significantly. For homeowners with a low existing mortgage rate, pulling equity through a cash-out refinance means giving up that rate on the entire balance -- which is expensive.
Construction Loan / Construction-to-Permanent Loan
For larger new construction projects or major additions, a construction loan provides funds that are drawn down in stages as construction milestones are met. The lender typically requires a detailed construction budget and may require inspections at draw milestones.
A construction-to-permanent loan converts to a standard mortgage after construction is complete. This is the standard financing vehicle for new custom home construction in Idaho.
Construction loans have more rigorous approval requirements than HELOCs and take longer to close. Plan for 30 to 60 days for construction loan approval.
Cash
For homeowners with the available liquidity, cash is the simplest financing option for additions and renovations. No interest, no lender conditions, no draw schedule approvals. Many Northern Idaho homeowners who have owned their properties for many years choose this option.
Practical Considerations
Before financing any construction project, have a clear, signed contract with your general contractor before applying for financing. Lenders financing construction projects want to see a detailed scope and budget. A vague scope creates problems at the loan approval stage.
Vandenberg Construction provides the detailed scope and budget documentation your lender needs. We've worked through the financing process with many clients and can help you understand what documentation your specific lender will require.
For questions about your addition or renovation project, call (208) 582-8733.