Paying for a Basement Remodel With a Personal Loan
If you’re lucky enough to live in a home with a basement, you may have considered transforming it into a space that is perfect for you and your family. Perhaps you considered making it into a home office, an entertainment room for movie nights or a playroom with storage for your kids’ growing cache of toys.
Regardless of how you decide to remodel your basement, you can add livable square footage to your home. Let’s dive deeper into whether a basement remodel is worth the investment and how you can pay for this type of home improvement project.
Is a basement remodel worth it?
According to the 2017 Remodeling Impact Report by the National Association of the Remodeling Industry (NARI), the average cost of a basement remodel is $40,000. A basement remodel will increase the value of the home enough to recoup 63% of the cost of the project upon sale.
According to the report, 7% of Realtors suggested sellers convert a basement to a living area before attempting to sell, but only 2% stated that the project helped them close a sale.
While a remodel may not help if your house is on the market, the report also found that 65% of consumers who have completed a basement renovation enjoy their time at home more than they did before starting the project.
4 financing options for a basement remodel
Since the average basement remodel is $40,000, you may be wondering how you can finance this type of project. To help you out, we’ve created this brief overview of basement remodel loans available, as well as the pros and cons of each.
1. Personal loans
You can use a personal loan for just about anything, including a basement remodeling project. Personal loans are borrowed from a bank, credit union or online lender and paid back in fixed monthly payments, usually over two to five years. The table below shows some of the personal loan rates and terms you may consider when financing your basement remodel.
- Financing flexibility: If you need a few years to pay off your basement remodel, you could get a short-term personal loan. If you need longer, you could simply opt for a longer repayment term.
- Fixed monthly payments: Since personal loans offer fixed monthly payments, you’ll know exactly how much you’ll owe every month.
- Interest rates kick in immediately: Once you commit to a personal loan for your basement remodeling project, you can expect to pay interest right away.
- Origination fees: You may be required to pay origination fees of 1% to 8% or more, depending on the loan you select.
2. Contractor financing
Many contractors work with a finance company to offer interest-free loans to their customers. If you opt for contractor financing to pay for your basement remodel, it’s important for you to understand the terms of the loan so that you can protect yourself.
- Convenience: Contractor financing may be a convenient option because it’ll allow you to work directly with the individual who is completing your basement remodel. Since they perform basement remodels, they can give you a better understanding of how much you can borrow or what you can accomplish for the cost.
- Interest payments on the entire balance: Chris Jackson, owner of Lionshare Partners, a financial planning firm in Los Angeles explains that if consumers do not pay off their balance in full and on time, lenders may charge interest on the entire balance, usually to the date of the purchase. This may occur even if the full payment is made only a day late. Jackson recommends checking Better Business Bureau reviews and asking for references before committing to contractor financing.
3. Home equity line of credit (HELOC)
Sidney Divine, owner and financial planner at Divine Wealth Strategies in Atlanta, advised a client to use a HELOC for his basement remodel. While a HELOC is like having a credit card, it’s tied to the equity of your home. If approved, you’ll likely be able to access around 80% of your home’s value, minus your outstanding mortgage.
- Lower interest rates: Paying for your basement remodel with a HELOC can give you the opportunity to tap into lower interest rates and more manageable payments than you’d be able to with a credit card.
- Tax deduction: You may qualify for a tax deduction if you use your HELOC to improve your home with a basement remodel.
- Quick approval: If you’d like to begin your basement remodel project right away, you may do so with a HELOC because the approval process is typically quick.
- Possibility of foreclosure and a poor credit score: A HELOC is secured by your home. Therefore, while your payments may be more manageable, defaulting may lead to foreclosure and a poor credit score.
- Fluctuating interest rates: HELOCs are adjustable-rate mortgages, meaning your interest rate fluctuates. Fortunately, some lenders offer interest rate caps to provide you with a bit more security.
4. FHA 203k loan
The FHA 203k loan is backed by the government and designed for homeowners with a down payment of at least 3.5% and a minimum credit score of 580. While the Standard 203k loan is for repairs over $5,000, the Limited FHA 203k loan is for minor repairs and remodeling that do not require structural work or exceed $35,000.
“I highly recommend a FHA 203k loan to a customer who is interested in a basement remodel,” said Tim Ellis, president of T.W. Ellis Home Remodeling in Forest Hill, Md. “It can give them the opportunity to get their house appraised based on the completed basement remodel before the project begins.”
- No out-of-pocket expenses: If you finance your basement remodel through an FHA 203k loan, you won’t have to pay for your basement remodel out of pocket.
- More money available: An FHA 203k loan may allow you to borrow more money to cover your project than you would be able to with a private loan.
- Lower interest rates: FHA 203k loans typically have lower interest rates than other types of loans.
- Rigorous requirements: There are a number of requirements that must be met in order to take out an FHA 203k loan. For example, your basement remodel needs to be for your primary home and you are required to hire a professional licensed general contractor. In addition, the process of obtaining an FHA 203k loan is more involved than a standard mortgage.
Comparing financing options
As you compare various financing options, it’s important to take the following into consideration:
- Interest rate: High interest rates can significantly increase the price of your basement remodel. Be sure to determine the interest rate of each financing option and calculate how much each one will cost you in the long run.
- Term length: By paying off your basement remodel sooner, you can pay less in overall interest. However, if you feel you won’t be able to pay off your loan in a shorter period of time, opt for a financing option like a personal loan as it offers an extended payoff period.
- Loan fee: Take the time to understand the loan fees across all the loan offers you consider. The ones with no or very minimum fees are likely your best bet.
- Monthly payment: Refrain from financing a basement remodel until you calculate your monthly payment and know it’s an amount you can comfortably afford.
- Risk: Some loans for basement remodels are riskier than others. For instance, you may face counterparty risk with contractor financing. Counterparty risk relates to the fact that the contractor may or may not perform the job to the degree of satisfaction you originally expected and at the agreed-upon turnaround time. If your goal is to reduce the risk of your loan, you may be better off with a personal loan, HELOC or FHA 203k loan.
If you decide a basement remodel makes sense for your particular situation, take the time to evaluate each financing option listed above carefully. By doing so, you’ll be able to transform your basement into a space you adore for a price you love.