A $15,000 project and a $250,000 project are two completely different financial decisions.
Most people aren’t sitting on enough cash to write a check for a major addition, whole-home remodel or new house. That doesn’t mean the project is out of reach. It means you need to figure out the financing before you figure out the finishes.
Smego Construction does not offer in-house financing, and we aren’t a lender. What we can do is help you understand what your project is likely to cost, so you can have a productive conversation with your bank or lender.
Here are the most common ways homeowners finance construction.
Let’s start with the obvious one. If you have the cash available and using it won’t leave you financially stretched, paying cash is the simplest option.
No loan application.
No appraisal.
No interest.
No lender controlling construction draws.
But I wouldn’t assume that paying cash is automatically the smartest choice just because you can. If a project would wipe out most of your savings, talk to your financial advisor or lender before emptying the account to build a new kitchen.
Construction has surprises. Life does too.
A Home Equity Line of Credit lets you borrow against equity you’ve built in your home. Instead of receiving one large lump sum, you’re generally approved for a credit line and can draw from it as needed, subject to the lender’s terms.
That’s one reason HELOCs can work well for remodeling. If your project is $80,000 but payments happen throughout construction, you may not need the entire $80,000 on day one.
HELOCs commonly have variable interest rates, so your borrowing cost and payment can change over time. Compare the rate structure, draw period, repayment terms, fees and maximum available credit before deciding.
For homeowners with substantial equity who plan to stay in their existing house, a HELOC is one of the first options I’d ask a bank about.
This sounds similar to a HELOC, but it works differently. A home equity loan generally gives you a lump sum rather than a revolving credit line, and you repay that loan over an agreed term.
For a project where the budget is already well defined and you know approximately how much you need, that structure can make sense.
The important comparison isn’t simply HELOC or home equity loan? Ask the lender to show you what each option actually looks like for your amount, equity, credit and repayment timeline.
Another option is refinancing your existing mortgage for more than you currently owe and using some of the proceeds for construction.
Suppose you owe $150,000 on a house worth substantially more. Depending on your qualifications and the lender’s requirements, refinancing into a larger mortgage could potentially free up some of that equity for the project.
But there’s a huge consideration here: you’re replacing your existing mortgage. If you currently have a particularly favorable interest rate, refinancing the entire mortgage to access renovation money may be much less attractive than it would have been under different rate conditions.
Don’t look only at the cash you’re getting. Look at what happens to the entire mortgage afterward.
Now we’re getting into larger projects. If you’re building a new home, a construction loan is one of the traditional ways to finance it.
A construction loan doesn’t necessarily work like a normal mortgage where the entire loan amount is handed over at closing. Construction money is commonly released in draws as the project progresses — for example, around stages such as:
The lender may inspect completed work before releasing the next draw. That means your contractor, construction schedule and lender all need to work together.
This is something you want figured out before construction starts, not when the first subcontractor needs paid. How construction loans actually work walks through draws, inspections, interest-only payments and what the lender wants from your builder.
If you’re building a new home, ask specifically about a construction-to-permanent loan. These products combine construction financing with the eventual permanent mortgage.
During construction, funds are released according to the lender’s draw process. Once the home is completed and the lender’s requirements are satisfied, the financing transitions into the permanent mortgage under the loan’s terms.
Exact structures vary considerably between lenders, so this is one where I would talk to several banks. Especially in Central PA — your local bank or credit union may have a construction product that looks very different from what a national mortgage company offers.
Here’s one homeowners don’t always know exists. There are mortgage products specifically designed to combine the house and the renovation into the financing.
One current example is Fannie Mae’s HomeStyle Renovation mortgage. It can be used when purchasing a house or refinancing an existing one, and allows eligible renovation costs to be incorporated into the mortgage. The lender uses plans and contractor information, evaluates the property’s expected as-completed value, and manages renovation funds through a controlled draw process.
This can be particularly interesting if you’re looking at an older house and thinking: I love the property, but this place needs $100,000 worth of work.
Instead of treating the purchase and the renovation as completely separate financial problems, ask a qualified renovation lender whether they can be financed together.
These loans are more involved than simply getting a check. The lender reviews the contractor and project, renovation funds are controlled, and draws are released as construction progresses.
There are also government-backed renovation mortgage programs, including the FHA 203(k) program. These are designed to allow eligible borrowers to finance a home’s purchase or refinance along with qualifying rehabilitation costs under one mortgage.
The requirements, property eligibility, mortgage insurance, contractor documentation and project process differ from conventional renovation loans.
I wouldn’t choose a house assuming a 203(k) will work and figure it out afterward. Talk to a lender who actually handles renovation mortgages before you write the financing plan around one.
Personal loans are another possibility, particularly for smaller projects. They’re generally unsecured, meaning you’re not necessarily borrowing against the house itself, and that can make the process simpler.
But convenience has a price. Depending on your credit and current market conditions, an unsecured personal loan may carry a substantially different interest rate than financing secured by your home.
For a smaller bathroom or exterior project, it may be worth comparing. For a $200,000 addition? I’d want to understand my home-equity and renovation-loan options before automatically financing that amount with unsecured debt.
For an entire remodel? I would be extremely careful.
A credit card can be useful for purchases you were already going to make and can pay off responsibly. It can also turn a $30,000 renovation into a very expensive $30,000 renovation if you’re carrying a large balance at a high interest rate.
Promotional financing can make certain purchases attractive, but read what happens when the promotional period ends.
Don’t finance a six-figure construction project one swipe at a time because nobody made a financing plan.
Don’t overlook this. Central PA has community banks and credit unions that lend against local real estate every day.
If you have good income, substantial equity, land, investments or an established banking relationship, sit down with an actual lender and explain what you’re trying to do. Not “can I borrow $150,000?” — explain the project:
“We owe this much.
The house is worth approximately this much.
We’re considering a $150,000 addition.
Here is the construction estimate.
What options do you have?”
That’s a much better conversation. For new construction, bring information about the land too.
This is something people don’t realize until fairly late. Certain construction and renovation loans require substantially more documentation than a normal homeowner-funded project. The lender may want:
Fannie Mae’s current HomeStyle Renovation process, for example, requires contractor and renovation documentation and lender oversight of project draws. Its model renovation contract includes an itemized scope, cost, subcontractor and supplier information, construction stages and corresponding payments.
This is one reason we put so much emphasis on what goes into a good construction estimate. For larger financed projects, paperwork isn’t separate from construction. It’s part of getting the project funded.
I’d ask a different question. What can I comfortably afford?
A bank approving you for a certain amount doesn’t mean you need to spend it. A $175,000 addition might be technically financeable. That doesn’t tell you whether the resulting monthly payment makes sense for your family.
Before you start designing around the maximum number a lender gives you, figure out what payment and total debt you’re actually comfortable carrying. Then let that number help define the project.
This is probably the biggest thing I want homeowners to take from this page.
Don’t spend two months designing a $250,000 addition if you realistically have $100,000 available. And don’t automatically abandon a project you think costs too much before understanding what financing options actually exist.
Get the order right.
Not the finishes. The shape of it.
Our calculator will give you a starting range in about a minute.
More than one. Local banks and credit unions especially.
Not the maximum you qualify for. What the payment actually feels like.
In that order.
That’s a much better process than falling in love with a project and trying to figure out how to pay for it afterward.
Smego Construction isn’t a bank, mortgage broker or financial advisor. We don’t offer financing and we don’t make money from the loan you choose.
Our part is the construction side: helping you understand the project, developing a clear scope and putting real numbers behind what you’re considering. Your lender’s job is to tell you which financing products you qualify for and what they’ll actually cost.
If you’re considering a remodel, addition or new home in Central PA, figure out those two numbers early: what the project costs and what you’re comfortable spending.
Everything gets easier once those numbers are in the same neighborhood.
We don’t take a referral fee and we don’t make anything if you use her. She’s here because she does the job properly.
This page is general information, not financial advice. Smego Construction is not a lender, mortgage broker or financial advisor, and nothing here is a recommendation about your particular circumstances. Loan products, eligibility and terms change and vary by lender — confirm anything here with a qualified lender before making a decision.
Fifteen minutes on the phone. You’ll have a realistic range before we hang up — and if we’re not the right people for it, I’ll tell you.