How to finance a detached structure and protect your home’s value
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Detached structures are a great way to add space and value to your home. Whether you use it as a workshop, storage space, carport or bonus room, adding a detached structure to your property could positively impact your property value.
Data from the National Association of Home Builders states that 85 percent of homebuyers rank garage storage as a home feature they want most, and 36 percent consider it an essential feature for their future home.
While the long-term benefits are great, detached structures are expensive to build. If you do not have the funds to pay for this home improvement project upfront, there are financing options available.
Should you borrow to finance a garage or detached structure?
Borrowing money to finance a detached structure could be a good idea if you have a plan in place to pay off your debt.
Many personal loans come with repayment terms of one to 10 years, while home equity loans and HELOCs could have repayment periods of up to 30 years. With both options, you’ll be responsible for making consistent monthly payments or risk the health of your credit score.
If you’re interested in borrowing a loan or line of credit, it’s wise to shop around with a few lenders. Doing so will allow you to compare rates and find the cheapest way to finance your detached structure. With any of these options, you’ll be paying back interest on top of your loan amount.
Some scenarios when it might make sense to finance your detached structure project include:
- If you have equity in your home that can be tapped to fund the project.
- If you don’t have all of the cash needed to pay the full cost of the project.
- If you have a solid credit score and will be able to obtain a competitive interest rate.
- If you have a plan to pay back the money.
How to finance your additions
You can, of course, pay for your detached structure in cash, but considering that they can cost up to $110,000, that might not be an option most homeowners can swing. Fortunately, if cash isn’t feasible, there are plenty of ways to finance your addition in a budget-friendly way that works for your household.
Home equity lines of credit — or HELOCs — can be a good way to finance a detached structure or any home improvement. HELOCs give you a line of credit to pull from (essentially like a credit card) based on the amount of equity you have in the home. You usually have 10 years to borrow from your line, and you’ll repay what you borrowed (plus interest) over the following 20 years or so.
There’s good news, too: Because HELOC rates fall when the Federal Reserve cuts its funds rate, you can get a good deal on one right now. Rates are extremely low, although it could be harder to get approved. Also keep in mind that HELOCs have variable interest rates, so your rate could rise over time.
A HELOC could be a good option if:
- You have great credit to take advantage of low interest rates.
- You have substantial equity in your home.
- You don’t know exactly how much money you need for your project.
A HELOC could be a bad option if:
- Your income isn’t reliable, and might not be able to take payments.
- You plan on selling your home soon which requires paying off your credit line, simultaneously.
- You don’t have strong credit.
Home equity loan
Like a HELOC, a home equity loan uses the equity you’ve built up in your home. However, a home equity loan is an installment loan, meaning you receive all of your funds at once and make payments in equal monthly installments.
Typically, the loan amount you can borrow is no more than 80-85 percent of your home equity. You’ll have to start making payments right away, but your interest rate and the monthly payment will never change.
A home equity loan could be a good option if:
- You need all of your funds upfront.
- You have substantial equity in your home.
- You prefer a fixed monthly payment.
A home equity loan could be a bad option if:
- You don’t have at least 80-85 percent equity in your home.
- Your financing needs change throughout the construction project.
- You don’t have strong credit.
Cash-out mortgage refinance
A cash-out mortgage refinance is the process of replacing your existing home mortgage with a new, bigger mortgage, then taking out the difference in cash. You can use this cash for any purpose.
Keep in mind, a cash-out refinance completely replaces your existing mortgage and may change your repayment timeline or monthly payments. It’s generally best to do this only if you can get a lower rate on your mortgage, but now could be an optimal time.
“Today’s rates remain near historic lows and represent a compelling opportunity to get the money they need for important purchases while locking in these great rates for another 30 years,” says Glenn Brunker, president of Ally Home. “In this way, the cash-out refi provides protection from rising rates in the future, which is an advantage over a HELOC.”
A cash-out mortgage refinance could be a good option if:
- You can obtain a better interest rate than you currently have on your mortgage.
- You want to revise or change your current mortgage terms.
A cash-out mortgage refinance could be a bad option if:
- You don’t qualify for a lower rate than your existing mortgage loan.
- You prefer to keep your current mortgage terms.
A personal loan can also be a solid option if you’re looking to add a detached structure to your property. The good thing about these loans (when compared to a home equity loan, for example) is that they don’t require collateral. And the proceeds from a personal loan can generally be made available very quickly, sometimes in as little as a few days.
The drawback, though, is that they typically have higher interest rates than home equity products. They also come with shorter terms than HELOCs, so you’ll likely need to repay the money back faster than with other options.
The amount you can borrow for a personal loan (and the interest rate you’ll get on it) will depend largely on your credit score, income and other debts. So if your credit is less than stellar, you might consider financing your project another way.
A personal loan could be a good option if:
- You don’t want to put your home on the line by using it as collateral.
- You need the money quickly.
- You have a solid credit score or a creditworthy co-signer.
A personal loan could be a bad option if:
- You need to repay the loan over a longer period of time.
- You don’t have strong credit.
Home renovation loans
Renovation loans, like the Federal Housing Administration’s 203(k) loan, can be good choices when looking to improve your home. Because they’re backed by the FHA, they come with low interest rates and aren’t too hard to qualify for.
The FHA also allows for 203(k) refinancing, which would allow you to refinance your existing mortgage into a 203(k) loan. This would give you the funds you need to pay for your improvements while also keeping you to a single monthly payment.
However, like all FHA loans, your property must meet minimum requirements to be eligible under a 203(k) refinancing loan. For example, the detached structure must meet the program’s list of eligible activities and your home’s value must be within FHA’s mortgage limit.
A home renovation loan could be a good option if:
- You want to refinance your existing mortgage.
- Your renovations are relatively inexpensive.
A home renovation loan could be a bad option if:
- Your home or construction project doesn’t meet the FHA loan requirements.
- You’re not ready to begin building within 30 days of closing.
Credit card rewards
As an alternative to a loan, the right mix of credit cards can help you reduce the total costs of your project while also letting you spread the expenses out over time.
To start, find out what rewards your existing credit cards offer. Do any of them offer discounts at home improvement stores or other similar retailers? If not, you might consider a credit card from Home Depot, Lowe’s or another hardware store that offers rewards and discounts.
If you have a cash back rewards card, you can also consider using this to fund your project. Just make sure to use the cash rewards for your monthly card payments.
Credit card rewards could be a good option if:
- You have a credit card that offers discounts at home improvement stores.
- You have a cash back rewards credit card.
- You’ve factored in credit card payments in your budget.
Credit card rewards could be a bad option if:
- You can’t repay your credit card statement in full each month.
- Your construction costs will exceed your credit card limit.
- You have a tendency to overspend and lose track of your budget.
Detached structure cost expectations
The costs and expenses you’ll need to cover will depend on the specific detached structure you’re looking to build. While some structures cost as little as a few thousand dollars, others can run as high as $100,000 if you get all the bells and whistles.
Overall, the cost of each detached structure will depend on the following factors:
- Your use of professional contractors
- The site preparation required (will you need a concrete foundation poured?)
- Any windows or doors required
- The electrical and plumbing requirements
- Roofing, framing and siding materials (metal costs more than wood)
- Any permits required
- The foundation you’re using
- Any paint, stain or decorative elements
Here’s a little more about what you can expect with each type of detached structure.
If you don’t have a garage or just need extra space to store a vehicle, a carport can be an easy and affordable choice. They can also be helpful if you need a rain-protected loading zone for kids, elderly residents or family members with disabilities.
The biggest downside to a carport is that it might require permits from your city. These can be tedious and sometimes costly. You will also need to check with your homeowners association and read your deed restrictions to ensure that carports are allowed in your specific community.
Cost-wise, HomeAdvisor estimates a carport costs anywhere from $3,235 to nearly $10,000, depending on the features you choose. Fixr, another home improvement site, says that the cost can go as low as $896 for a basic carport.
Boat shelters fall into the carport category when it comes to detached structures, though they will typically cost more due to their larger size and higher height.
Detached garages can serve many purposes. Use them traditionally as a place to store your car or use them for storage, as a workshop or as a combination of all of these. They’re versatile spaces that increase your home value and your square footage.
Unfortunately, a detached garage is going to be the most expensive structure you can add to your property, with a cost anywhere from $25,215 to $110,000 on average. HomeAdvisor says that the project can go as low as $10,000 if you really go bare-bones with your project.
Storage sheds and barns
Sheds and barns are also popular detached structures that can be used for both storage or personal space. A trend is the “she-shed” or “man-cave” addition, which offers residents a private at-home retreat without too much financial investment. You can also turn a shed into a fun playhouse for the kids.
The best thing about sheds is that they’re typically quite affordable. Though HomeAdvisor estimates a range of $100 to $15,000 for shed, barn or playhouse additions, Fixr reports the national average at just over $5,600, making them one of the most affordable detached structures on the list.
How to estimate your costs
The expense of building a detached structure depends on the size of the structure you hope to build, as well as the materials and finishes you select. Several home improvement sites can help you outline the materials your project will involve and what these items will cost. These sites detail how much a garage project may run you per square foot, as well as what you can expect to pay for permitting, roofing materials, drywall, framing, different types of garage foundations, siding materials and more.
If you decide to skip the DIY route and hire a contractor to handle your detached structure project, it’s important to have a firm understanding of what you hope to achieve, says David Steckel, a home expert with Thumbtack.
“Do you want to have a small office space or do you want to create a new living area that can be rented out?” asks Steckel. “This goal is translated by the general contractor into a scope of work budget, which provides an explicit, line by line, description of what work is going to be completed, a rough estimate as to what level of finish and a cost for everything.”
When reviewing potential contractors, do background checks with the Better Business Bureau and check that the company has a contractor’s license. It’s also a good idea to obtain references from previous clients or read Yelp and Google reviews.