Are you planning to add a garage to your home or expand your existing space? It is a costly project that can be complex, but you can make the process seamless by creating a budget for the renovation, choosing the right funding option, and developing a realistic plan of action to move forward.
How Much It Costs To Renovate or Build a Garage
On average, you can expect to spend between $7,000 and $30,000 to renovate your garage, notes Angie’s List. The average cost depends on the scope of the project and the expenses associated with labor, supplies, and building permits.
The average garage will cost approximately $18,000. Lower-end renovations can reach $3,000, while high-end home improvement projects for your garage can get as high as $65,000. The costs will also vary if you want a detached structure like a storage shed or if the garage is a part of your home’s structure.
Should You Get a Loan for Your Garage Project?
Unless you have several thousand dollars lying around, you may be considering a loan for your garage project. Here are a few reasons why financing the costs could be a sensible option:
- Potentially increase your home’s value: An investment in an upgraded or new garage could boost the equity you have in your home, consequently increasing your borrowing power. The increase in your home value could also mean a higher profit if you decide to sell your home.
- Make your space work for you: Have you considered relocating to a home with more space? Instead, convert your existing garage to create added living space or build a new one.
- Avoid tapping into your emergency fund: A loan offers the advantage of financing your garage project without depleting the funds in your emergency savings account.
- Get affordable monthly payments: With the right form of financing, you can enjoy low monthly payments that work for your budget. Plus, you could get an extended loan term to pay the balance in full.
- Complete the project on time without cutting corners: Ensure that the project is completed on time without compromising on quality. You won’t have to substitute high-quality materials with inferior ones or delay the garage project in case of fund shortages. A loan can cover the costs upfront, allowing you to focus on completing the project correctly.
What are the Costs and Fees Associated with Garage Financing?
Garage financing can be a good option if your credit score is high and you need extra cash. However, each financing option will come with several costs. Here’s what you can expect.
Interest Rates
Interest rates significantly impact your total costs. It’s a good idea to build credit while considering a renovation so you can secure a lower interest rate. Lenders will also look at your debt-to-income ratio and other metrics to determine your rate. The type of loan you receive determines if you will receive a fixed interest rate or a variable interest rate.
Origination Fees
Lenders charge origination fees to reflect costs incurred during the application process. A professional has to review your information to see if you qualify for a loan. Various administrative services are included in the origination fee.
Closing Costs
Closing costs are additional expenses you must cover when you finalize your home improvement loan. These costs can include attorney fees, appraisal fees, and other expenses. Some lenders let you waive closing costs in exchange for a higher rate.
Prepayment Penalties
Most types of financing have prepayment penalties if you decide to pay off your loan early. You won’t have to worry about prepayment penalties if you only take out one loan instead of constantly refinancing.
Garage Financing: Your Loan Options
If you’re ready to renovate or build a garage, explore these loan options.
Home Equity Loan
A home equity loan allows you to borrow 80 to 90 percent of your home’s current value minus your outstanding mortgage balance. The interest rates are often lower than what you’ll find if you refinance your home. Plus, the interest you pay on the home loan could be deductible if the loan proceeds are used for improvement purposes. However, this option may not be viable if you haven’t built up enough equity in your home.
Home Equity Line of Credit (HELOC)
Like a home equity loan, a HELOC is a second mortgage that allows you to tap into your equity to get the funding you need. The funds are accessible through a line, though, and you’re free to withdraw what you need during the draw period of up to 10 years. You will also make interest-only payments on the amount you borrow. Once the draw period ends, you will make principal and interest payments that could fluctuate as interest rates are usually variable.
A HELOC may seem appealing to the average homeowner. But it’s still not feasible if you’re a new homeowner with minimal equity or your home value hasn’t quite appreciated the way you thought it would due to market conditions.
Personal Loan
Home improvement or personal loans are unsecured, making them attractive to homeowners. However, the interest rates are sometimes on the high end, and the repayment periods are brief. So, you’ll likely be stuck with steep monthly loan payments that could stretch your budget too thin. Also, be mindful that the lending process may be simple, but there’s a chance you may not qualify for the total amount you need.
Credit Card
Unless you qualify for a credit card with a promotional interest rate, this option is not ideal to fund your garage project. In fact, it could cost you several hundred or thousands more interest. And suppose you’re unable to pay off your credit card balance before the zero-interest period ends. In that case, the garage conversion or build could cost you a mini fortune.
Construction Loan
Construction loans are designed to fund new homes, but they are sometimes used for garage conversions or new builds. And for a good reason – the amount you may be eligible for is based on your home’s after-renovation value.
The downside is these products come with a complex draw and inspection process, and you’ll have to refinance your existing loan. Also, closing costs could be steep as the new loan amount is based on what you owe and renovation costs.
Cash-Out Refinance
Some homeowners use a cash-out refinance to renovate or build their garage. You can borrow up to 80 percent of your home’s value (minus the mortgage balance) through a cash-out refinance. The loan amount is then rolled into your existing balance to create the new mortgage. Plus, you will be responsible for closing costs to secure the new loan.
A higher loan balance means a steeper monthly payment. And if the new interest rate is higher, it wouldn’t make sense to use a cash-out refinance to fund your garage project.
203(K) Loan
FHA 203(k) loans are backed by the federal government and let you borrow up to $35,000 for eligible home improvements. (confirm garage repairs are on the list) The amount you’re eligible for is based on your home’s future value after renovations and is ideal if you have less-than-perfect credit.
The lending process is complex, though, so you could experience construction delays.
How to Qualify for Garage Financing
You have plenty of garage financing options, but lenders will review your credit and additional information to determine your eligibility. Here’s what you need to know about obtaining garage financing.
Credit Score Requirements
Lenders will check your credit score to see if you fulfill the minimum requirement. You shouldn’t have a problem with financing if you have a FICO score of 620 or higher. Building credit will help you access low rates. A low credit score can limit your options and make obtaining a sufficient lump sum more difficult.
Income and Employment Verification
Lenders will also assess your finances when reviewing your application. Having consistent employment over the past two years will give you more choices. Companies will also review your income to determine how much you can afford to pay back each month.
Equity and Down Payment Considerations
Depending on your financial situation, it may make sense to use equity to finance the garage renovation. Using a home equity loan or a HELOC can help you secure a lower interest rate and more generous payment terms.
You need enough equity in your property to use a home loan. Cash-out refinances also require that you have sufficient equity built up in your property. Homeowners build equity with monthly mortgage payments and as their properties appreciate over time.
Loan Amount and Term Limitations
Homeowners should establish garage renovation budgets that account for labor, material costs, and other expenses before exploring different garage financing options. You’ll know how much you have to borrow to finance your home improvement project.
Knowing the amount will help you avoid needing a second loan, and you can also establish the optimal term length. Loans with low lump sums can usually have shorter terms. A shorter term gets you out of debt sooner, and a low lump sum is more manageable.
However, if your garage renovation is on the high end, you may want a lengthier term. Borrowing capital from your property value gives you loan options with terms as long as 30 years. Personal loans usually have much shorter term lengths and rarely exceed seven years. A lengthier loan term keeps you in debt for more years but reduces your monthly payments.
How to Secure Garage Financing
Building your credit score, getting your finances in order, and trimming your financial obligations will make it easier to secure garage financing. You will have to submit several applications to various lenders. Comparing rates and terms can result in more favorable financing.
FAQs About Garage Financing
If you have a good credit score, it is easy to get a loan to build a garage. However, you will have fewer financing options if you have bad credit.
Homeowners can refinance their homes to build a garage if they have enough home equity.
It’s possible to finance a garage if you have bad credit, but fewer financial institutions work with borrowers who have low credit scores.
