How to Pay to Finish Your Basement

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Imagine this – you finally decide to march on and tackle that basement project you have been postponing. You have always thought it would be a great space for the kids to play, a home office, a storage room, a man cave, or just an escape, but you just haven’t gotten to it until now. You’re finally plugging along, remodeling and setting things up when a stressful realization comes over you – you need more funding to actually complete the project. Fear not, though, because you have options! 

So what can you do?

Initially, the best thing to do before even beginning to redo or finish your basement is to have an estimated budget plan. In 2017, the National Association of Realtors released a report indicating that remodelers normally spend an average of $40,000 on a basement. Of course, making your basement into a perfect room will greatly increase the value of your house, but you need to be willing to pay for the renovations. You should know beforehand how much you have to spend and how much more you might need. 

Personal Loans

Firstly, you have several options that will allow you to carry on with your project despite being low on funds. Personal loans are one of the most popular options, as they normally provide you with fixed monthly rates and the length of time you have to pay off the loan is usually set depending on your needs. Most of the time, they’ll allow you between two and five years, but circumstances can differ on a case-by-case basis. 

You can get personal loans from an Internet lender, bank, or local credit union, and each typically offer at least a few different options. These offer you great flexibility but do have downsides. For starters, interest starts adding up immediately, and depending on what type of loan you get, you may also be required to pay an origination fee, which is usually between 1% and 8%. 


Secondly, consider contractor financing. Look around and see if you can find a contractor who collaborates with a financial firm that will offer you an interest-free loan. Partnering with a contractor is also convenient and an attractive option because you will be working with someone who can provide you a much more honest estimate price than, say, Google could. You’ll want to pay your loan off in full before time runs out, though, or you may get charged interest for the entire cost of your project. Of course, you should always take an extra look at the terms and conditions of whatever contractor financing agreement you enter into. 

Home equity line of credit (HELOC)

Many of us have seen commercials or advertisements for a home equity line of credit (HELOC), but you may not know what that actually is other than a fancy financial phrase. A HELOC is sort of like a credit card, as it is a line of credit secured by your home. These normally provide you with a line of credit that you can use for a set amount of time – typically 10 years – and come with the typical “revolving” line of credit that you find with a credit card. This time period is called the “draw” period, and you are free to take the money out as you need it. 

Normally, if your HELOC gets approved, you’ll have access to approximately 75% of your home’s value, not including the mortgage you still owe. You’ll likely be able to get a lower interest rate than other options and, if your situation is right for it, you may also be able to get a tax deduction by using one of these. That all sounds great, but beware that interest rates can vary greatly in a short amount of time, and you also must be sure you have the money to make the payments. Otherwise, since your HELOC is tied to your home, you could lose it by being forced into foreclosure.   

Home Equity Loans

Unlike HELOCs, home equity loans provide you with the total amount of your loan up front and you do not have the option to “draw” when you need to. These are like taking out a second mortgage and you would repay the loan each month like you do with your regular mortgage. On average, borrowers are able to obtain up to 85% of the equity in their homes. This number decreases, however, if borrowers’ credit score, home value, or income are at substandard levels. In terms of interest, home equity loans are usually like standard loans that come with a fixed interest rate, so it is best to take out the loan at a time when interest rates are low and subsequently make payments in full because interest costs can really add up.

FHA 203(k) Loan

Although meeting all of the requirements and getting approved can be tricky, another option to obtain funding for your remodeled basement is to get an FHA 203(k) loan. Also referred to as Rehab Loans or FHA Construction Loans, these are backed by the Federal Housing Administration (FHA). The FHA works with lenders to provide you with up to 110% of your basement project’s value, so users are required to have an appraiser come get an estimate.  

There are two types of FHA 203(k) Loans – Limited and Standard. Limited 203(k) loans are provided for basement projects up to $35,000, and standard loans are provided for basements that will cost more than $35,000. Both types are normally either a 15 or 30 year fixed-rate or adjustable-rate mortgage. If your credit score is at least 600 and you can put down at least 3.5% of the loan, you may be eligible. Although using this type of loan can be an excellent option, there are many requirements and nuances that come with eligibility. You will be required to work with a contractor and other restrictions apply in order to get approved. 

Remodeling your basement doesn’t have to be as hard as you think! Financial options are available to you, so be sure to do your research and pick the one that is right for your specific needs. 

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