Borrowing money

How to finance an individual structure

For a homeowner looking to increase the value of their property and add usable space, a detached structure like a garage or shed can be a smart way to build up equity in a home.

It can be expensive to pay for the construction of a separate new structure, but there are ways to finance these types of home improvement projects. The type of financing that will best suit your budget will depend on factors such as how much equity you have in your home and if you have good credit.

Whether it’s a home equity loan, a renovation loan or a Personal loanhere’s what you need to know about financing an individual structure.

Types of detached structures

Common types of detached structures include a stand-alone garage, guest house, shed, and carport. If you need access to cash to build a detached structure, you may qualify for certain types of financing if you have at least 15% to 20% of your home’s equity and a good mortgage rating. credit. Many lenders prefer to see a credit score of at least 700.

Detached garage

Building a detached garage offers homeowners an 80% return on investment on average, and can cost between $16,000 and $40,000, according to HomeAdvisor, which warns that the cost of some building materials, including siding, has risen 5-10% this year. If you’re building a high-end three-car garage, it could cost up to $110,000, according to Fix. Remember that the interest rate of your financing also plays a role in the final cost of your home improvement project.

Guest House

The average cost to build a 600 square foot guest house is $55,000, HomeAdvisor Estimates, but it can range from $5,000 to $100,000 (or as high as $300,000 for a high-end unit in an expensive neighborhood). If a guest house is built and operated correctly, it can offer a high return on investment, or ROI, due to its rental income potential.

Barn or shed

Depending on the size and quality, you can spend anywhere from a few hundred dollars to as much as $30,000 to build a shed or a small outdoor storage unit. according to HomeAdvisor. If you are building a larger structure, such as a barn, be prepared to spend between $10,000 and $200,000, Fixr estimates.


Like a garage but with some sides removed, a carport also offers an ROI of at least 80%, according to remodelingcosts.organd will cost, on average, between $2,000 and $10,000, depending on how simple or high end you want to achieve, says Fix.

Determine what you want to build and why

First decide what you will use your individual structure for and whether the investment is right for you financially. Consider working with a financial advisor to assess your long-term goals and determine if this type of construction project makes sense.

Here is a checklist of what to ask yourself before investing your time, resources and money:

  • What are your short- and long-term goals and financial constraints?
  • How will your new individual structure be used?
  • How long do you plan to stay at home?

Once you’ve determined your goal, call lenders and contractors to compare quotes and start budgeting.

How to estimate your costs

Interview various builders and contractors, and talk to people who have done similar projects and research price ranges from different sources. You will need to determine how each element of the build will affect your total budget. Consider the costs for things like:

  • DIY Costs vs Labor Costs
  • Contractor and builder rates
  • Work with architects, designers or engineers
  • Complexity of construction (additional electrical outlets, plumbing)
  • Material costs, including quality and availability

In current economic climateit is prudent to add a reserve to your budget considering issues such as global supply chain issuesshortages of raw materials and geopolitical instability. If your contractor experiences a delay in shipping wood, it could increase the cost of your project.

Ways to Fund Your Additions

Some homeowners have the option of paying for home renovations in cash upfront, but for many, financing such an expensive project with a loan paid off over time is more realistic. The main differences between the types of financial products include the interest rate and the repayment terms of the loan to the bank or lender.

A home equity loan and a home equity line of credit, for example, each have lower interest rates than personal loans or credit cards because they are secured loans that require the homeowner to give away their home. as collateral if he does not repay the loan. . This allows the bank to offer a lower interest rate. If you choose to finance your project with a credit card, you’ll likely pay a higher interest rate, but the bank won’t be able to repossess your home if you don’t make your payments.

Home Equity Loan

A home equity loan provides you with a lump sum of cash at a fixed interest rate by borrowing against the equity in your home. With this option, you have consistent monthly payments, with a typical repayment period of between five and 30 years.

One of the biggest benefits of using a home equity loan for home renovations is that interest is tax deductiblesaving you thousands of dollars over the life of your loan.


A HELOC is a loan that lets you borrow against the equity in your home and works like a credit card that you can access the funds for a certain period of time (usually 10 years), then repay over a repayment period (usually 20 years). A HELOC is useful when you’re not sure how much money you’ll need or for how long, because you may continually make withdrawals over time when you need more funds, or not withdraw all of your money. line of credit if you need it. less.

“HELOCs have gained popularity as a large percentage of homeowners are now locked into historically low rates, and they have also found themselves with record equity in their homes as prices have risen,” says Paige Hawley, Senior Director of Origination at Morty , an online mortgage marketplace.

But you may be hit with sticker shock once your repayment period begins, and you won’t have started paying off your principal balance yet. A HELOC also has a variable interest rate, which means your payments can fluctuate monthly, unlike a home equity loan. Be sure to plan for a range when budgeting your monthly HELOC payment.

Cash Mortgage Refinance

A cash-in refinance replaces your existing mortgage with a brand new mortgage and provides the landlord with a cash lump sum to use for projects such as home renovations. This lump sum is added to your new mortgage balance and can be paid off in one monthly payment, usually at a lower interest rate than the original mortgage. However, since mortgage rates have jumped beyond 7% at the end of September, a cash refi is unlikely to benefit most homeowners at this time.

“Overall, mortgage rates have risen significantly, which may make any type of refinance less attractive and less beneficial compared to maintaining an existing mortgage and paying off other debt in a different way,” warns Hawley.

FHA 203(k) loan

A FHA 203(k) loan is a home improvement loan backed by the Federal Housing Administration that allows an eligible homeowner to incorporate the cost of home improvements into their mortgage, creating a loan. This consolidates your borrowing costs and mortgage into one monthly payment, simplifying the repayment process. There are benefits of FHA 203(k) loanslike the upfront financing option, but a major downside is that your renovations need to be completed within six months, which could be risky given ongoing shipping and supply chain delays.

Personal loan

A Personal loan will generally have a higher interest rate than an equity loan because it is unsecured and riskier for the bank. A typical repayment period is 10 years, but loan terms vary by lender. This type of credit may be easier to approve because you don’t have to be a homeowner to qualify. But as with any loan, more your credit scoreand the healthier your financial life, the lower the interest rate you will receive.

The bottom line

There are several ways to finance an individual structure. The right type of financing will depend on factors such as the equity in your home, your income and your credit score. To help increase the value of your property while benefiting from your investment, adding a detached structure such as a garage or shed by tapping into your home’s equity or taking out a 203 renovation loan ( k) could be an ideal option.

Whatever type of financing you choose when building a freestanding structure, be sure to shop around and compare rates and terms from multiple lenders. The more lenders you interview, the better your chances of get a lower interest ratesaving you thousands of dollars over the life of your loan.