Financing a home addition or renovation usually means borrowing against your home, refinancing, using a renovation loan, or paying from savings. Each one fits a different situation, and the best choice depends on your equity, your current mortgage rate, and how sure you are of the final cost.
Here is how the common options work, in plain language. Talk with your lender or financial advisor before you choose; this is a starting point, not financial advice.
Why a fixed price makes financing easier
Lenders want to know exactly what they are paying for. Fannie Mae’s HomeStyle renovation rules, for example, require a signed contract that itemizes the work and states the agreed cost before the loan closes (Fannie Mae Selling Guide B5-3.2-06).
At Oak City Homes, you make every selection during Design and get a fixed construction price before we build. That gives you and your lender a real number to plan around. See how it works on our pricing page.
HELOC (home equity line of credit)
How it works. A HELOC lets you borrow against your home’s equity as you need it, up to a limit, during a set draw period (CFPB). After that, you stop borrowing and repay what you owe.
Who it fits. Homeowners with good equity who want flexibility, or who will pay for the project in stages.
Pros. You borrow only what you need and pay interest only on what you have drawn. Your first mortgage stays as it is.
Cons. HELOCs usually have a variable rate, so your payment can change, and payments often rise when repayment starts. Your home is the collateral, so falling behind puts it at risk.
Home equity loan
How it works. You borrow a lump sum against your home’s equity and repay it over a set term, usually at a fixed rate (CFPB). If you already have a mortgage, it is a second mortgage (CFPB).
Who it fits. Homeowners who know the full project cost up front and want one predictable payment.
Pros. A steady payment, and your first mortgage rate stays the same.
Cons. There may be upfront fees and closing costs. As with a HELOC, your home secures the loan.
Cash-out refinance
How it works. You replace your current mortgage with a larger one and take the difference in cash (Freddie Mac).
Who it fits. Homeowners whose current mortgage rate is no lower than today’s rates, or who want a single loan and payment.
Pros. One loan and one monthly payment.
Cons. Freddie Mac notes that cash-out refinances typically come with higher rates and costs. It also resets the rate on your whole balance, not just the new money, which a HELOC or home equity loan does not do (CFPB research).
Renovation and construction loans
Renovation loans lend against what your home will be worth after the work is done, not just what it is worth today. That can help if you don’t have much equity yet.
FHA 203(k). An FHA-insured loan, through FHA-approved lenders, that rolls a purchase or refinance and the renovation cost into one loan (HUD). It can be used for additions.
The Standard 203(k) covers structural work, has no set maximum for renovation costs, and requires an FHA-approved consultant. The Limited 203(k) covers non-structural work up to $75,000 (HUD Mortgagee Letter 2024-13).
Fannie Mae HomeStyle Renovation. A conventional loan for a purchase or refinance that includes the renovation. Renovation costs can be up to 75% of the home’s “as completed” value on a refinance (Fannie Mae Selling Guide B5-3.2-02).
Who they fit. Buyers renovating a home they’re purchasing, and owners without much equity yet.
Pros. You can borrow based on the finished value, in one loan.
Cons. More paperwork and lender review, and the money is often paid out in stages as work is completed. Both programs need detailed plans, specifications, and costs before closing.
Paying in cash, or combining sources
How it works. You pay from savings, or use savings for part of the cost and borrow the rest.
Who it fits. Homeowners with savings who want to limit or avoid borrowing.
Pros. No interest and no loan to qualify for.
Cons. It ties up cash you may want to keep for emergencies or the unexpected.
A note on taxes
The IRS says interest on home equity loans and lines of credit is deductible only if the money is used to buy, build, or substantially improve the home that secures the loan, and limits apply (IRS Publication 936). Talk with a tax professional about your situation.
What to do next
We start with a free discovery call about your goals, timeline, and budget. If it makes sense to keep going, we visit your home for a $150 in-person consultation and review your plan and price range with you.
Start talking with your lender during Design. Your fixed construction price at the end of Design tells you exactly how much to plan for, as part of our Dream, Design, Build process.
Home additions start at $150,000, and full home renovations start at $200,000. See what a home addition costs in Raleigh, or explore home additions and home renovations.