Homeowners are increasingly turning to remodeling or finishing a basement as a way to create additional space in their homes.
But finishing a basement can be expensive, and many homeowners need to explore the different financing options available to them to get started on the project. Choosing the right type of financing can be confusing, though. But it doesn’t need to be that way, and in this guide we’re going to take a look not just at the average cost of finishing a basement but at the pros and cons of 6 different basement financing options.
6 Types of Loans for Basement Financing
When it comes to choosing the right way to finance your basement renovation, it’s no surprise that homeowners often become confused, with a number of different options available, all with different eligibility requirements, interest rates and more.
- RenoFi Loan (Home Equity, HELOC, Cash-out Refinance)
- Traditional Home Equity Loan or HELOC
- Traditional Cash-out Refinance
- Construction Loan
- FHA 203k/Fannie Mae Homestyle
- Personal Loan/Home Improvement Loan
To help you make the right decision, below we’ll take a look at the pros and cons of 6 different options for financing your basement remodel.
A RenoFi Loan
RenoFi Loans are a new type of home renovation loan that lets you borrow based on your home’s after renovation value.
That’s how much it will be worth once your home improvement project has been completed, given that when you carry out work, the value typically increases.
Think of RenoFi Loans as combining the best bits of a construction loan with a home equity loan.
Let’s look at this further.
One of the key advantages of a RenoFi loan is that you will be able to borrow against the projected value increase of your property. Your basement finishing project is an investment, right? Investments are designed to provide you with returns in the form of increased value, so it makes sense that you should be able to borrow against this.
As this is a projected value, there is no need for you to have built up equity in the property before you get approved, and you’ll be able to borrow up to 90% of your home’s after renovation value.
A RenoFi Loan can increase your borrowing power by an average of 11x when compared with a home equity loan.
And this is one of the reasons why RenoFi Loans are quickly gaining popularity, given that it can take many years to build up the equity that’s needed to use a traditional home equity loan or cash-out refinance, making these options inaccessible to newer homeowners.
RenoFi Loans come in three forms:
- RenoFi Home Equity Loan
- RenoFi HELOC
- RenoFi Cash-out Refinance
The most money and lowest monthly payment for your renovation
Borrow up to 90% of your future home value with a Renofi Renovation Loan
I WANT TO RENOVATE:
Home Equity Loan Or Line Of Credit (HELOC)
You will likely find that this kind of loan provides you with lower interest rates when compared with those of personal loans and credit cards, and the interest may be tax-deductible, provided you are able to show that you are increasing the value of your property.
With a home equity loan, you will be able to lock the interest rates, providing easier planning for the future, although this may not be possible with a HELOC.
But there’s one problem with this type of financing.
And that’s the fact that these loans are inaccessible to those who haven’t built up sufficient equity. And that’s a problem.
Equity takes time to build up. Just look at how long it takes to build up $100k of tappable equity:
Newer homeowners especially are limited when considering options that use equity, often forcing them to turn to high-interest personal loans, credit cards or even reducing the scope of their project. And we don’t think that should be the case.
But the fact remains that if you haven’t built up enough equity, this is going to limit your borrowing power, as this type of financing only allows you to borrow up to 90% of the value of your property, minus any outstanding mortgage payments.
And this is one of the reasons why so many homeowners are turning to RenoFi Loans. And even those who do have tappable equity available, this type of financing makes it possible to get started on your entire renovation wishlist today, rather than doing it project-by-project over many years.
A traditional cash-out refinance lets you refinance an existing home loan to free up cash for home improvement projects such as basement finishing.
But we’re pretty set on the fact that some homeowners shouldn’t use a cash-out refinance for renovations.
Why? Because some people find themselves forced to refinance into a higher rate, losing out on the great one that they’re locked into. There’s also the need to pay closing costs on the entire loan amount, rather than just what’s needed for the renovation.
The only exception to this is when refinancing significantly reduces the rate against what you’re paying on your current mortgage and unless this is the case, there’s almost certainly going to be a better alternative for you.
With a construction loan, you’re able to borrow based on your home’s after renovation value, just like you can with a RenoFi Loan.
Construction loans are intended to be used to pay for ground-up construction, but they’re often considered as a way to finance a renovation. Why? Because until recently, they were one of the only options that let you borrow based on your home’s future value. That’s no longer the case, however.
When using a construction loan, you’ll be forced to refinance your existing mortgage (often onto a higher rate), be forced to pay closing costs based on the entire loan amount and face a complex inspection and draw process for funds to be released to you or your contractor.
And for this reason, many contractors flat out refuse to work with this type of financing.
You’ll almost certainly find that a different type of financing is better suited for your basement project.
FHA 203k Or Fannie Mae HomeStyle Loan
FHA 203k and Fannie Mae HomeStyle Loans are two government-backed renovation mortgages that are designed to help individuals finance the purchase (or refinance) of a property and the required renovation costs into a single loan.
Both of these loans let you borrow against your home’s after renovation value, but some with a number of complexities that can result in delays and unnecessary stresses. If you’re using these loans to finance the renovation of an existing property, you’ll be required to refinance, usually onto a higher rate.
That said, both options are designed for those with less than perfect credit scores, and for this reason, approval is relatively easier to achieve when compared with other types of loan for those who have a poor credit history.
The credit score requirement for a RenoFi Loan is 660, and if you’re not going to be able to qualify on these grounds, consider either of these loan options and take a look at our FHA 203k Loans vs Fannie Mae HomeStyle Loans guide.
Personal Loan / Home Improvement Loan
Homeowners often turn to personal loans to pay for basement remodels when they’ve not got sufficient equity available to use a home equity loan, line of credit or cash-out refinance.
Some will also instinctively turn to what is often advertised as a home improvement loan. Why? Because they’re led to believe that they’re a specialist financial product that’s perfect for all types of home improvement projects. You might even see these advertised as basement loans.
But what many don’t realize is that these are actually high-interest unsecured personal loans advertised at homeowners looking to undertake certain projects.
While personal loans might sound like a good option for paying for finishing your basement, they come with a wealth of drawbacks including lower borrowing power, shorter repayment periods and higher interest rates.
A higher interest rate, of course, means higher monthly payments, and these loans typically sit somewhere between 8% and 15%; almost double what you could get on other types of financing.
That said, personal loans (and even credit cards) are often well-suited to smaller, lower-cost projects. And when you consider that RenoFi Loans start from $20k, it’s important to think carefully about how much you need to borrow.
What’s The Best Way To Finance Finishing A Basement?
We’ve taken a look at some of the basement financing options at your disposal, so which one is best for you?
While it often comes down to your personal situation, how much you want to borrow, and what you feel comfortable putting up as collateral — basement projects are highly varied, so you need to understand the costs fully before you commit to a financing option.
In most cases, a RenoFi Loan is going to meet your needs and is the perfect way to borrow all of the money you need at the lowest monthly cost. Just remember that, with RenoFi Loans, you’re using a product that is designed specifically with home renovation in mind.
To discover more about basement financing, RenoFi Loans, and what one could help you achieve with your project, get in touch with our team today.