Most homeowners tackle various home improvement projects to create additional space and add value to their property. One of these is basement remodeling or finishing. However, this project can be quite expensive depending on the square footage of the area and the materials you choose.
Luckily, there are financing options that can cover the costs of remodeling your basement. Choosing the right type of financing can be confusing, but it doesn’t have to be that way. To help you explore all your basement financing options, we cover the pros and cons of each below.
How Much Does It Cost To Finish A Basement?
The overall cost of basement finishing depends on several factors. Take into consideration the basement size, preferred type and quality of finish, labor rates, and material costs. According to HomeAdvisor, the expenses can go from $7 to $23 per square foot or $15 per square foot on average.
Home Equity Line of Credit (HELOC)
HELOCs are commonly used for home improvement projects as they work like credit cards. You can make purchases until you reach your maximum during the draw period. Once you have reached the ceiling, they will charge interest on only the borrowed amount.
The advantages of HELOCs are low interest rates and possible tax deductions. It also has adjustable interests, which can rise or fall over time. A HELOC allows you to borrow between home’s equity, which means you can borrow between 80% and 90% of your equity. It uses your home as collateral. You should never fall behind on payments, or else your property will be foreclosed.
Home Equity Loan
Like a HELOC, home equity loans allow you to borrow against your home’s equity. You will get a lump sum of money for your basement remodel, which you’ll have to pay off within 5 to 15 years. Your interest rate won’t change over the life of the loan. This is ideal if you want fixed monthly payments.
However, rates are generally higher than those for conventional mortgages. It also has a risk of foreclosure and high closing costs of as much as 5% of the loan amount.
FHA 203(k) Loan
This type of government-insured mortgage allows you to take out loans for both home purchase and home improvement projects. There are two kinds of 203(k) loans backed by the Federal Housing Administration: a limited and standard one. A limited or streamline 203(k) loan is for homes that do not require structural work. If your basement remodel costs around $35,000, a limited 203(k) is perfect for you.
On the other hand, a standard 203(k) loan is meant for major and extensive home renovations. The minimum amount that you can borrow is $5,000.
Most FHA 203(k) loans typically have lower interest rates but more rigorous requirements. The application process is also much longer since you need to coordinate with both the FHA and the lender.
Personal Loan
If you don’t want to put your property as collateral, then a personal loan is the ideal option. You can typically borrow between $1,000 and $50,000, which can be repaid within 12 to 60 months. Personal loans offer great financing flexibility, so you can choose between short and long-term loans. With this basement financing, you will pay a fixed amount monthly.
One perk of using a personal loan is that borrowers can get approved quickly. This means you can get the loan amount as fast as within the day. Since personal loans are unsecured, your home won’t be foreclosed if you default on the loan.
However, the Annual Percentage Rate or APR can be high. The APR is the yearly rate of interest that you are charged for borrowing money. With a personal loan, you will have to start paying interest as soon as you take out the loan. There are origination fees of 1% to 8% that you are required to pay.
Contractor Financing
Most contracting firms offer financing options for their clients. They usually work with lenders to help you deal with financial shortfalls during your basement remodel. Depending on your contractor, you can get little to no interest for the loan. This option is very convenient since the contractor will guide you about the project costs. Moreover, the total loaned amount will be tailored to your project.
One disadvantage of this financing option is it is only available in shorter terms. You are required to repay the principal amount and interest within 12 to 18 months. In addition, you will likely pay more since contractors include financing fees.
Compare Your Basement Financing Options
Remodeling or finishing your basement can significantly increase the value of your home. It’s always best to compare different financing options to get the best deal and favorable terms. Before you make a decision, you should be in a financially stable situation. Avoid taking out a loan if you’re already deep in debt.
The next step is to choose the right basement contractor. You should work with someone reliable, experienced, and in a position to provide quality services. At Pittsburgh Basement Remodeling, we help homeowners turn their dream basement into a reality.
Our dependable team understands both your vision and goals. We aim to make your basement project work within the constraints of your budget. Let us bring your basement ideas to life. Call us today to get an estimate!