Real Estate

How to Finance a Garage Build or Remodel

March 28, 2022

When it comes to improving spaces in your home, your garage shouldn’t be overlooked. Are you curious about the best way to get garage financing?

That said, the cost is a major factor for many people when it comes to building or remodeling their garages. In some areas, the cost to build a two-car garage can exceed $28,000.

The good news, however, is that you don’t have to tackle home remodel refinancing alone. That’s because there are several ways of financing a garage build.

Are you wondering how to get a loan for a garage? In this guide, we’ll discuss garage financing and break down the several options for a custom garage build or remodel.

1. Home Equity Loan

A home equity loan, also called a second mortgage, allows you to borrow funds against the investment you’ve made in your home.

Home equity refers to the difference between your home’s value and your remaining mortgage. Its total value generally reflects your initial down payment, the amount you’ve paid down in mortgage principal, and any increase in your home’s market value since the time of purchase.

Because lenders use your home equity as a basis for determining how much you can borrow, the higher your home equity, the more you can potentially borrow.

Type of Home Equity Loans

There are two types of home equity loans:

Fixed-rate loan – A fixed-rate home equity loan is a loan with a fixed interest rate that you repay over a set number of years. For most home equity loans, the interest rate is around 5-6% and the repayment period is 15 years.
Home equity line of credit (HELOC) – Functioning like a credit card, a HELOC is a home equity loan that comes with an adjustable (variable) interest rate. Borrowers can withdraw funds when needed, but their monthly payment is subject to change based on the interest rate.

Whereas a fixed-rate loan is useful for one-time garage remodeling, and HELOC can be useful for recurring upgrades.

How Home Equity Loans Work

How can you use a home equity loan to build a garage or repair your garage door?

Suppose you have $80,000 in home equity and your garage remodeling is expected to cost $14,000. If you borrow 20% of your home equity, you’ll have $16,000—more than enough to work with.

However, as with all loans on a fixed interest rate, you’ll end up paying back more because of interest. Over a 15 year period, at a fixed interest rate of 6%, you can expect to pay back $24,303.

Because a home equity loan uses your home as collateral, financial factors like your credit score and income may not impact your eligibility as much as they would for a personal loan. While accessibility can make these loans attractive, keep the following in mind:

You’ll add to your debt – A home equity loan is just that— a loan. Consider whether you’ll be able to keep up with your new monthly debt payments. If your goal is to remodel your garage before selling your house, consider whether the financial risk is worth the potential added value to your home.
They’re not free – Besides interest, home equity loans come with other costs. You’ll likely have to pay for a professional appraisal to determine your home’s market value. Likewise, there are closing costs associated with these loans. While you may be able to roll them into the loan, that means you’ll owe more money, plus more interest.
You’re creating a lien on your home – As we noted, home equity loans are second mortgages. And just as with a traditional mortgage, failure to keep up with your payments can result in foreclosure.

2. FHA 203(k) Loan

A potential financing option for low to moderate-income households, an FHA 203(k) loan is a loan offered by the U.S. Department of Housing and Urban Development and insured through the Federal Housing Administration.

Unlike a home equity loan, an FHA 203(k) loan allows you to quickly build home equity by raising the value of homes in need of drastic repairs. What’s more, FHA 203(k) loans can be taken out by local governments and nonprofits on behalf of individual families occupying the residences.

How FHA 203(k) Loans Work

FHA 203(k) loans bundle the cost of repairs into a new mortgage or a refinance. To determine how much you can borrow, a HUD-approved lender calculates your expected mortgage once repairs are completed.

For example, suppose your potential home is valued at $200,000 before repairs. Because of the spacious two-car garage you intend to build, your home’s value is expected to climb to $250,000. Your FHA 203(k) loan is thus $250,000 (the cost of your home as-is plus repair costs).

However, it’s important to note that you don’t receive this full loan amount. A percentage of this loan is used to pay your mortgage while another is placed in an interest-accruing account to be released during the home rehabilitation process.

Stipulations

Although an FHA 203(k) loan can be helpful for some homeowners looking to make major upgrades to their garages, they do come with more stipulations than home equity loans.

For starters, FHA 203(k) loans mandate that you spend a minimum of $5,000 on repairs. What’s more, these repairs must be completed no later than six months after the loan closes.

Further stipulations include:

Your eligibility – As we noted, FHA 203(k) loans are only available to homeowners who are purchasing or refinancing their homes. That can mean a lengthy credit approval process. However, if you less than perfect credit, FHA loans for bad credit are great alternative to finance your home improvment needs. If you’re already happy with your current mortgage interest rate and term, you may not want to refinance.
What you can improve – While Full FHA loans allow you to undertake complete structural rebuilds, Streamlined FHA loans restrict what you can improve. While custom garage builds and remodels are covered under FHA loans, there may be restrictions on the type of garage you can build.
Eligible structures – You can only use FHA loans on certain types of dwellings. These include mixed-use residences with commercial spaces, properties converted from one-unit residences to multi-unit residences, and a few others. You can’t use FHA loans on investment properties or co-op properties.

3. A Home Improvement Alternative

While home equity loans and FHA-backed loans can both serve as types of home improvement loans, they also come with many big disadvantages. These disadvantages include:

Restrictions – If you’ve amassed a ton in home equity, have an impeccable credit score, and a high income, lenders are more than willing to let you borrow sizable loans. However, this just isn’t a reality for many people. Lenders often ignore borrowers who don’t meet certain financial thresholds.
Added debt – Will you be able to afford your new monthly payment with the added cost of your home improvement loan? Keep in mind that this cost includes not just the principle, but also the interest payments, plus any closing costs.
Speed – Some loan types don’t allow you to access all of your equity promptly. If your garage is in urgent need of renovation for health or safety issues, you may need cash upfront without all of the waiting, hassle, and paperwork.

Sale-leaseback programs can help provide a way to make your equity actually work for you.

Sale-Leasebacks as an Alternative

Although loan types have their advantages, a sale-leaseback is not a loan, but serves as a real financial solution. A sale-leaseback can provide more ease and personalization, with less fees than a loan might.

By converting your equity into cash, a sale-leaseback can provide the resources you need to turn that old one-car garage into your dream garage. If you’re considering a sale-leaseback program, contact a financial advisor to help you explore your options.

Key Takeaways

If you are looking for garage financing for your new build or remodel, consider an Home Equity Loan (HEL), FHA 203(k) Loan, or solutions with less restrictions like sale-leaseback programs. If you’re not sure after reading this article which solution is best for you, reach out to a financial advisor to get more personalized advice.

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