7 Financing Options for a Basement Remodel or Renovation
When you decide to finish your basement, you’re opting to make an investment. The additional finished square footage can increase the appraised value of your home, and the extra living space enhances its comfort and functionality. For many homeowners, the only thing holding them back is the cost; not everyone has the cash on hand to pay for a home improvement project of this scope. Before you table the idea, however, consider available financing options. Perhaps a new basement is more feasible than you think.
1. Home Equity Loans
A home equity loan is just that–a loan which uses the value of your home’s equity as collateral. The loan amount is based upon the value of the property, which is determined by an appraiser from the lending institution. Terms of a home equity loan can range from five to fifteen years, and the loan must be paid in full if the home is sold prior to the end of the term.
2. Home Equity Line of Credit
A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line. Similar to a credit card, as you repay your outstanding balance the amount of available credit is replenished. You draw against the account as needed, then pay back only what you borrow, plus interest.
3. Personal Home Improvement Loan
If you don’t have enough equity to apply for a home equity loan, a personal home improvement loan might be an option. Like any unsecured personal loan, it’s not guaranteed by your home. The interest rate you receive depends upon your creditworthiness, and is usually fixed, which means you can reliably schedule monthly payments into a budget. Common terms for a home improvement loan range from three to five years in length.
4. FHA Title 1 Loan
An FHA Title 1 loan is a fixed-rate loan that can be used for home improvements and repairs, and is designed for the homeowner with not enough equity to qualify for a home equity loan. The maximum term for a Title 1 loan is 20 years, and the maximum loan amount is $25,000. A Title 1 Loan usually has an affordable payment plan. To qualify, you must have a debt-to-income ratio of 45% or less, your home must have been built and occupied for at least 90 days, and you are required to verify that loan proceeds are used for specifically-intended property improvements.
5. Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new home loan for more than you currently owe on your home. This involves refinancing a loan so that the new loan is larger than before, and you receive the difference in cash. In other words, the bank increases the amount of your loan, but gives you the cash for your remodel. There is no separate payment. The payback is included in your new mortgage payment. You must have equity built up in your house to use this financing option.
