Home additions are a great way to expand your living area. Such modifications greatly enhance the value of your property. However, a home improvement project can turn out to be a costly affair. Especially if you’re planning a large-scale renovation such as a room addition, a roof replacement, a kitchen remodel, or a bathroom renovation. Unless you have a good amount of savings set aside, you’ll have to consider home addition loans — and the best ones, mind you!

With the right construction loan for a home addition, you can manage your finances in the most affordable way. You can sail through the renovation process without any hiccup — be it tackling the total cost of the home remodeling, your contractor’s fees, the cost of new material, or labor costs.

So, are home additions worth it? Yes. Home additions are a rewarding investment. They not only increase the value of your home but also add to your luxury or convenience.

Plan your air room additions properly with our estimator tool.

What are home addition loans?

These home renovation loans provide you funds for significant home improvements — whether it’s for renovating, remodeling, or repairing a home. It can be in the form of a home mortgage, a mortgage refinance, home equity loan, a home equity line of credit (HELOC), an unsecured personal loan, or a government loan, including Fannie Mae HomeStyle or FHA 203(k) loans.

When should you consider a home addition loan?

If you do not have the required amount of cash for your renovations or repairs, financing a home addition is your best bet. Furthermore, if you’re a homeowner who wants control over building equity in your home, by making substantial upgrades, home addition loans can be a valuable tool in improving the value of your property.

Average home renovation cost estimator by house size

Whether you’re adding square footage or simply upgrading your home, you need to factor in the total home renovation cost. It can vary between $10,000 to $70,000 on average, with high-end projects costing up to $150,000. 

However, the actual overall cost of your house renovation project will vary according to a lot of factors, including the total square footage of your house, the size of the rooms, the condition of your property, local labor costs, material costs, your zip code and the scope of your remodeling project.

Here’s a look at how your house size can make a difference to the total remodeling cost. 

Square Feet Average Cost Price Range
1,000$19,000$10,000 to $60,000
1,500$37,500$15,000 to $90,000
2,000$50,000$20,000 to $120,000
2,500$62,000$25,000 to $150,000

Want to create a budget for your home addition project?  Try our free home remodel cost estimator

What type of loan is best for a home addition?

Home Addition Financing Home Addition Loans Requirements/Minimum Credit Score Minimum Down Payment Requirements
Home equity loan / HELOC62020% equity on your home
Personal loan620NA
Fannie Mae HomeStyle loan6205%
FHA 203(k) loan6203.5%
Cash-out refinancing64020% equity on your home

Read more: HELOC Vs cash out refi

How to finance a home addition?

There are various types of home renovation loans available. It’s important to understand their differences, the pros, and cons before choosing the most suitable financing plan for your requirements. Let’s look at some of the most popular home addition financing options.

Fannie Mae HomeStyle

This renovation loan allows you to either buy a fixer-upper that needs repairs or refinance your existing home loan and get sufficient money for home improvements. The loan amount goes into a separate escrow account that pays your remodeling contractors. 


You need to pay back just one loan with one monthly payment; not separate ones for home mortgage and home repairs. A single loan cuts down on time and closing costs.


Borrowers do not have direct access to the loan funds. To qualify, there are stricter credit score requirements and debt-to-income ratio standards. The loan application process is usually longer than a conventional mortgage loan.

Read more: HVAC financing for good & bad credit

FHA 203(k) loan

Here, the FHA sets the mortgage amount limits. The good news is that government backing makes obtaining the loan easier for eligible borrowers.

There are two types of FHA 203(k) loans: Limited 203(k) loans (capped at $35,000) and Standard 203(k) loans (for major construction projects).


Affordable interest rates. This loan is suitable even for those who do not have a good credit score.


Lender fees may be higher. This loan cannot be used for a property that will be sold within 90 days of the home improvements. 

Home equity loan

A home equity loan is a fixed-rate loan that provides you a lump-sum amount — with monthly payments that remain the same for the entire loan term.


Lower interest rates than a personal loan or credit cards. The loan amount can be used for any purpose.


You use your home as collateral, so you need good equity. Any payment default could lead to property foreclosure. Potential fees, closing costs and prepayment penalties.

Home equity line of credit (HELOC)

Home equity line of credit (HELOC) makes use of the equity in your home to get you a line of credit from which you can draw the required funds. Moreover, you pay interest on just the amount you actually use. HELOCs typically come with a 10-year draw period and a 20-year repayment period.


You only pay interest on what you use from the revolving balance. Comes with lower interest rates, especially for the first 12 months. 


Variable interest rates. Any payment default may lead to foreclosure of the property. May have upfront fees, including application or loan-processing fees.

Read more: Using loans for paying for home remodel

Personal loan

Want to finance a home addition without equity? An unsecured personal loan is your best choice. Since there’s no collateral or home equity involved, the loan eligibility is based on your credit score, income, credit report and credit history. Borrowers with an excellent FICO credit score get the best interest rates. 


The loan money can be used for any purpose. No requirement for a home appraisal. Quick funding. 


Limited loan range of $1,000 to $50,000; may not be enough to cover the entire renovation cost. Higher interest rates. May have costly loan origination fees.

Cash-out refinance

Here, you can refinance your mortgage in order to get a higher amount than the existing mortgage. This funding uses your home equity as a collateral. You can use the difference in cash for your home addition financing.


The loan works well if you can get a lower rate on your new mortgage. Lower interest rates help in the proper budgeting of your renovations.


You require at least 20 percent equity in your home to qualify. The total loan amount is limited to your home equity.

Find out how much your room additions will cost with our estimator tool.

Want to apply for home addition loans?

If you’re planning financing a home addition, you can begin by choosing the most suitable funding option. Kukun’s home renovation loan options will make your home addition dreams a reality — in an affordable, manageable manner. So, go ahead and get instant loan approval, with absolutely no hidden fees and penalties. 

Read more: Home remodel financing options

Home Addition Loans: Financing a Home Addition was last modified: August 29th, 2022 by Ramona Sinha
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