Financing home improvement and construction projects

Published on April 21, 2020 | Richard W. Landau

Thinking of remodeling your home? Dreaming of building a new one? Or just mulling over a minor home improvement project? If your answer is “yes” to any of these questions but you don’t know how to pay for it, then keep on reading…

Construction projects from the smallest to the largest can be expensive and difficult to pay for out of savings. Fortunately, whether you are looking to remodel a bathroom, add a new bedroom or build a new home, there are several financing options available to you. And with interest rates at historic lows, now is the time to stop dreaming and start building!

Your options

1. For smaller home improvement projects, such as adding granite counter-tops in your kitchen or remodeling a single bathroom, consider an unsecured personal loan. These loans are typically offered up to $25,000 depending on your credit score and income. Rates for unsecured loans are higher than those for equity loans but borrowers with good credit can now get rates under 8.5%¹.  Not bad when compared to the national average credit card rate of 19.02%².  Other benefits of personal loans are faster approvals, no closing costs, and usually there are fewer documentation requirements³. Furthermore, this option is a great alternative if you don’t have enough equity in your home for a home equity loan. For more information on unsecured personal loans read my blog Benefits of personal loans.

2. If you wish to undertake a bigger project, such as remodeling a kitchen, finishing a basement or constructing a small addition to your home, consider a home equity product. These typically range up to $500,000, offer much lower rates than unsecured personal loans, and borrowers typically don’t pay closing costs. These products also offer borrowers flexibility because they can choose from a loan with fixed monthly payments or an interest-only line of credit.

3. Another option is a residential construction loan. This option is generally used for the largest projects, such as building a new addition to your home, taking on a major home remodeling effort, or for building a brand new home. These loans usually are interest-only for the construction period and then revert to an amortizing loan once the construction project is complete.

If you are planning to build a home from the ground up, a first mortgage construction loan is your best option. These loans help you finance the cost of purchasing land and constructing the home or for gutting your existing home and rebuilding it. If you wish to expand your existing home or significantly remodel it, you have two options: a first mortgage construction loan or a second mortgage construction loan.  A first mortgage construction loan allows a borrower to refinance their existing first mortgage balance and obtain the funds needed to cover the cost of construction. On the other hand, a second mortgage construction loan will cover your construction costs while allowing you to keep your existing first mortgage loan. No matter which financing option you take – be prepared for cost overruns. As your project takes shape, it is natural to make changes to your plans, build a little bigger or use nicer materials. So consider adding at least 10% to your initial budget to cover these cost overruns.

Learn more about our loans

1. Rates at Webster Bank start as low as 8.24% depending on credit score and loan amount (rate as of April 21, 2020).

2. National average credit card rate as posted on WalletHub.com on January 7, 2020.

3. Rules for verification of income and assets vary based on loan amount and credit score.