How to Finance a Home Addition Project

Skittles1 · Mar 22, 2012

Looking for some advice on how to finance a home addition. Here's the situation: we were thinking about selling our house, and moving to a larger house, but decided that we love our neighborhood and our childrens' school, so we thought putting an addition on our home would be the perfect solution. But, apparently it is not possible for us to get a HELOC because we don't have enough equity in our house. If we refinance with cash out, the most we can get is $17,000, which would not be enough. What is confusing to me is that if we moved, we would be approved for a much higher mortgage, and we can afford a much higher mortgage. We bought a modestly priced house 9 years ago, which is valued higher now than when we bought it, because we didn't want to be strapped by our mortgage. I feel like now, in being fiscally responsible with our home choice, we are being punished in that we can't obtain a loan to cover a home additon. I'm looking for any suggestions on how to make this work.

siesta · Mar 22, 2012

home improvement loan through wells fargo, they offer 0% APR for 12 months. If you can pay it off in a year its a great option.

zinger1457 · Mar 22, 2012

Think of it from the banks perspective. If you don't have adequate equity in the home and you default on the loan there is nothing for the bank to recover, the 1st mortgage gets paid off first. Did the bank appraise the value of your house correctly, is it too low?

Rose Pink · Mar 22, 2012

Mortgage loans of any type are more difficult to get these days than they were 9 years ago. Back then the banks were reckless with loans and we had the mortgage crisis. Now things have tightened up. Maybe too much but as Zinger pointed out, the equity in your home is your collateral.

As for what to do, we've been remodeling our home in stages for 20 years. How much can you accomplish with 17K? Is it enough to get the outer shell done? You can complete the interior in stages as you are able to save the money. For example, I replaced all the windows in our home, but I did it one or two rooms at a time. Can you live with that? If not, just start saving up and pay cash when you are able to make up the difference from what the bank will loan you.

ronparise · Mar 22, 2012

not only do you have to qualify for the loan, your house has to qualify too...I dont know your market, but here in SW Florida its cheaper to buy an existing home than to build a new one. ...which means you will probably spend more on the addition than the value it will add to your home...

Thats an impossible situation for a bank to deal with, unless of course you have a ton of equity now

You will probably do better buying another home in your neighborhood that fits your needs, and selling yours.

but you may be to find a builder that will hold a second mortgage or you could pay cash

Good luck

zinger1457 · Mar 23, 2012

siesta said:
home improvement loan through wells fargo, they offer 0% APR for 12 months. If you can pay it off in a year its a great option.

Wells Fargo also offers a Refinance and Renovate loan. It allows you to refinance at an amount that your house would be worth after improvements. But Ron makes a good point about being able to buy an existing home for much cheaper than you could build one, that's certainly the case in the big cities here in Arizona. If the current cost/sq-ft to build an addition is more then the current value (cost/sq-ft) of your house then the addition would probably add less value to your house then what it cost. And as Ron stated it might be a better value to sell and buy another bigger home.

Skittles1 · Mar 23, 2012

zinger1457 said:
Think of it from the banks perspective. If you don't have adequate equity in the home and you default on the loan there is nothing for the bank to recover, the 1st mortgage gets paid off first. Did the bank appraise the value of your house correctly, is it too low?

I certainly do understand it from the bank's perspective. It still frustrates me though. My husband and I have both been at our jobs for 10+ years, have FICO scores of 800+, and can afford to add the cost of an addition to our monthly payments. But unfortunately, we don't have enough saved to pay cash for this project. We may end up just doing our kitchen. Though it does seem like moving would make more sense from a financial standpoint. There is not much inventory right now in my school district, not to mention that I probably will not get what I want for my house. Thanks for all the great advice! I am gonna look into that Wells Fargo loan.

ronparise · Mar 23, 2012

Skittles1 said:
I certainly do understand it from the bank's perspective. It still frustrates me though. My husband and I have both been at our jobs for 10+ years, have FICO scores of 800+, and can afford to add the cost of an addition to our monthly payments. But unfortunately, we don't have enough saved to pay cash for this project. We may end up just doing our kitchen. Though it does seem like moving would make more sense from a financial standpoint. There is not much inventory right now in my school district, not to mention that I probably will not get what I want for my house. Thanks for all the great advice! I am gonna look into that Wells Fargo loan.

The market frustrates a lot of us...house values are down, and interest rates are down, but its really hard to put a deal together..my experience here is that more deals fall apart because of credit and and appraisal issues than go through...Last year well over 50% of the deals that our office handled were cash transactions

Rose Pink · Mar 23, 2012

As mentioned, you can also bypass the banks and CUs and see if you can get financing directly through contractors. Have you looked into Sears' programs?