How To Finance a New Garage or Detached Structure

Article Summary:

Adding a garage or detached structure can be useful. It can also add value to your home and earn you income. For those who don’t have the cash available to pay for the addition, financing options such as personal loans, home equity loans, and home equity lines of credit (HELOCs) can solve the problem. Before you start comparing loans and repayment terms, you should choose the type of structure you want to build and how you want to use it, since these crucial decisions will help determine which type of financing is best for you.

Most of the development after WWII in the United States revolved around an approach to urban planning that focused on building out the suburbs with access to the city. Today’s advocates of centrally planned development — who favor higher population density, a traditional grid system for streets, and easier access to public transit — decry the suburban sprawl created by their differently-minded forebears. Whether you agree with the new central planners or enjoy the less urban feel of your sprawling suburban neighborhood, however, one thing is clear: in most of the U.S. today, unless you live near an urban center, you will likely find that having a car is essential. If having a car is essential, then you may decide that having a garage to house your car is also a must.

Know what you want to build and why

Whether you are looking to build a garage or an additional structure, you first need to identify why you are building it. Are you building it just to house cars? Is the purpose of your build to increase the value of your home when you sell it? Or are you building it so that you can earn some income with short-term rentals? And what are you building, exactly? Once you have decided on the structure and purpose of your garage or detached building, you must decide how to pay for it. You can use classic financing options related to your home, such as a cash-out home refinance or a home equity line of credit (HELOC). You can also get a personal loan based on your credit or take advantage of such special financing products as dedicated garage loans and loans designed to cover various remodeling expenses.

Separate product or marketing rebrand? In reality, specialized “garage loans” may often just be loans used for various purposes labeled in a way a lender’s marketing department thinks will sell. For instance, you may find FHA 203(k) Home Rehab loans, which we’ll discuss, marketed under that label. Potentially, any loan you could use to build a garage might be marketed to you as a garage loan.

Structures

Different types of detached structures have different uses and can vary in quality. Depending on your goals, the cost can range from a few thousand dollars all the way to $150,000 for something of exceptional quality with a more costly purpose. Here are some structures that you might choose to build.

Detached or attached garage

A simple garage, either attached and sharing a wall with the home or detached as a standalone structure, is the starting point for most people who have cars yet lack a place to store them. It must be noted that detached garages can serve many purposes. For those who only have one vehicle, the extra space can be used to store goods or have a workshop.

Many activities that can’t get done in the home, such as those that bring in a lot of excess dirt or produce a lot of waste, can be done in a garage workshop. Although some builders will start at $10,000, realistically, you will be paying $25,000-$100,000 for a normal two-car garage. If you wish to build a four-car garage, expect to pay significantly more.

Guest house

A guest house is a very smart structure to build these days. This is because you can rent out a guest house via short-term rentals with Airbnb. In many cities, such as Denver, Colorado, you can only Airbnb your primary residence. Therefore, if you build a guest house, you can Airbnb the additional structure while living in your home. This is a phenomenal way to earn residual income. Furthermore, with a guest house, you can use the income to pay back the loan that you took out to finance the additional structure.

If the purpose of your guest house is to generate income and not have the occasional friend stay, then you have a bit more leeway in terms of your loan. The income you intend to receive can dictate how you finance your guest house. A decent guest house will cost you $40,000–$150,000, depending on what you put inside.

Sheds and barns

Sheds are a great way to store things that you prefer to store outside the home. You can also use sheds for workshops. If you are living in a more rural area and want to purchase animals such as horses, barns are an absolute must. A shed or barn will be on the lower end of the spectrum and range from a few hundred dollars to $15,000. It’s safe to say that a shed, on average, is going to cost around $5,000. If you want a nice barn, you will probably need to spend closer to $15,000.

Carport

If you aren’t interested in building a full-on detached structure or an attached garage, but you still need a place for your cars, you should consider a carport. A carport is a limited structure similar to a pavilion. It offers covered protection for your cars. Note that using a carport doesn’t put your car “indoors” like using a garage. It’s an outdoor structure that usually consists of foundations, pillars, and a covering structure. Because it is a simpler structure requiring fewer materials, a carport costs significantly less than a garage. Although carports can cost as little as $1,000, expect to pay $3,000+ for a decent one.

How to finance your garage or detached structure

So you know exactly what you want, but it’s going to cost more money than you initially expected. In this case, you are probably going to require financing. As many people add additions to their homes, such as a garage, on a regular basis, the financing options are numerous. Here are some of the standards:

HELOCs

HELOC stands for home equity line of credit. With HELOCs, lenders offer to let you draw out money based on how much equity is in your home. Equity is the current value of your home minus how much you still owe on it. If your lender approves a $100,000 HELOC against the equity in your home, you can draw money from this line of credit, up to the $100,000 limit, during what’s called the draw period. The amount you withdraw becomes debt that you need to repay.

The great part of a HELOC is that it is a revolving line of credit that enables a borrower to withdraw in installments. If you need $30,000 to build a garage, you can draw the $30,000 from your $100,000 HELOC. This enables you to withdraw only what you need and pay back the lender on the smaller amount, rather than receiving the $100,000 in a lump sum. In a HELOC, you typically have 5–10 years to borrow money against your line of credit (this is the draw period). You can usually pay back the loan over 10–20 years.

HELOC lenders will typically let you borrow up to 85% of your home’s equity. Certain lenders may permit you to borrow more.

If you don’t have the cash flow to afford a new monthly payment or don’t qualify for a HELOC, you may want to consider a shared equity agreement

Cash-out mortgage refinance

A cash-out refinance is effectively the replacement of an existing mortgage. With cash-out mortgage refinancing, you are able to replace your smaller, partially paid mortgage with a bigger one based on the current value of your home. In this case, you cash out a lump sum that represents most of the equity you have built up in the home. Most lenders will only let you borrow up to 80% of your available equity with a cash-out refinance.

Be aware that with mortgage refinancing, in most cases, you will be taking out a lump sum that is greater than the cost to build the home addition. This can be food for thought for those not wanting to take on too much debt. However, if you invest the cash in an intelligent manner, you could theoretically earn a decent return on the additional cash. Furthermore, if you plan to produce income with your addition, you may be willing to take on more debt, since your short-term rentals, such as through Airbnb, will produce income that will help ensure you can meet your debt-payment obligations.

Looking to get a great deal on a mortgage refinance? Here are some lenders that we recommend you take a look at.

Home equity loan

Like a mortgage refinance and a HELOC, a home equity loan lets you borrow against your home equity. The major difference is the amount and the payment terms. Like HELOCs, most home equity loans will let you borrow up to 85% of the equity in your home. If your goal is to maximize the percentage of your equity you can pull out of your home, the extra 5% allowed by HELOCs and home equity loans may make you prefer one of these over a cash-out refinance.

On the negative side, home equity loans require that you start making monthly payment on your loan balance right away. As well, if you have not yet paid off your first mortgage, taking out a home equity loan will mean making monthly loan payments on both your first and this second mortgage every month. This can make home equity loans more burdensome for some than cash-out refinances.

The interest rate will usually be locked in for the duration of your home equity loan, which can’t be said for many HELOCs. Home equity lines of credit often fluctuate with the benchmark prime rate. If you are under the impression that rates will surely go up, it might be smart to do a fixed-rate home equity loan. This way, you can take advantage of today’s rate rather than risking the future with a variable-rate loan. Alternatively, you can seek out a HELOC with a fixed rate.

Home renovation loans

The Federal Housing Administration, or FHA, has a special program, 203(k) Rehab Mortgage Insurance. This program insures certain home improvement loans, allowing lenders to offer borrowers very low interest rates for home renovations. The interest rate is low because the government backing removes most lender risk. Not only are the interest rates low, but the payment plans are more than workable. These could even be considered specifically “garage loans,” since that is way they are commonly used. So don’t be surprised if a lender’s special “garage loan” is just such a loan.

The only caveat with the FHA 203k program is that both your project and home must qualify under the program. If you are planning on building some type of strange Zen garden, then it might not qualify for the program. (Or it might, since landscaping is a qualifying class of improvements.) If your planned garage does not resemble those in comparable buildings in your area, that also might not qualify. Furthermore, your home’s value must be within the parameters that the FHA deems acceptable.

To learn more about FHA 203(k) loans an how to get one, read What is an FHA 203K and How Can I Qualify?.

Personal loan

Personal loans can be used for a variety of purposes, including constructing a garage or additional structure. These loans differ in one major way from asset-backed loans related to your house. They are based on your credit history rather than the value of an asset. You will find there are also many more options for personal loans.

Because personal are riskier for the lender, expect to pay much more interest than with the home-secured loans discussed above. Your solid credit score will play a major role in the interest rate you’re offered when approved for a personal loan. As personal loans do not have the low interest rates of asset-based loans, we recommend using a personal loan as the last option to build your garage or addition.

Pro tip: If you plan to get a personal loan, your credit score is important. Assuming the addition is not imminent, you can build your credit score to a number where your personal loan terms will be much more favorable. Read How to Improve Your Credit Score for guidance.

How to get started

So you have a great idea for building a small structure on your property that you can rent out short-term via an Airbnb listing. Here are some easy steps to take to turn that idea into a reality.

  1. Decide which type of structure you want to build and how nice you want it to be. If you want to achieve maximum rentability, it might be smart to incorporate bells and whistles.
  2. Speak to multiple contractors to estimate the price. Make sure you tell them exactly what you are looking for, and be certain to explain it in detail to each contractor.
  3. Call your local bank or whichever lender you received your mortgage from. Do they offer home equity loans, refinances, or HELOCs? If so, what are the terms?
  4. Select the contractor you want to go with and confirm the price.
  5. Apply for lending through your bank, credit union, or another lender.
  6. Once financing is achieved, you can pay a deposit to the contractor and start to build!

FAQ

What is the best way to finance a garage addition?

Individual circumstances vary, so no single financing option will be best for every borrower. For most borrowers, a HELOC is often the best option for financing a garage addition. For borrowers and projects that qualify, FHA 203(k) loans can also be excellent.

How do people afford to build a garage?

People afford to build a new garage via financing options or cash.

Can you add a garage to your mortgage?

You cannot add a garage to your existing mortgage. However, you can take out a second mortgage to pay for a garage (home equity loan or HELOC) or use funds from a cash-out refinance of your first mortgage.

How do you finance a car garage?

HELOCs, home equity loans, cash-out refinancing, and personal loans are some options for financing a new garage, or improving an existing garage.

Key takeaways

  • Building a garage or detached structure can add value to your home and even help produce income.
  • A car garage, guest house, carport, or shed are examples of structures that most people need to take out a loan to finance.
  • Construction financing options include asset-backed loans such as HELOCS, home equity loans, and mortgage refinancing, as well as unbacked personal loans.
  • If you want to ensure that you borrow no more than you have to, make sure you get the best deal from a contractor of choice before you apply for a loan. Or apply for a HELOC then draw out only the funds you need once you sign a deal with a contractor.

Additional SuperMoney resources

Do you want to finance a kitchen remodel rather than a garage or detached structure? Read Kitchen Remodel Financing: How to Finance Your Dream Kitchen to learn more. If you own a vacant lot zoned for residential housing and want to customize you build at a reasonable price, take some time to learn about modular homes. Do you have a significant amount of money to invest, or can you qualify for a mortgage larger than what you need for a single-family home? Perhaps you should consider investing in a multifamily home.

View Article Sources
  1. 203(k) Rehab Mortgage Insurance — U.S. Department of Housing and Urban Development
  2. Suburbia is Subsidized: Here’s the Math — Not Just Bikes
    Though this YouTube channel is not an authoritative source, the writer found this video an interesting and accessible introduction to the topic.
  3. The Problems With Planning: A Free-Market Guide To Suburban Development & “Urban Sprawl” — Competitive Enterprise Institute
  4. Urban sprawl — Encyclopedia Britannica
  5. Useful background articles from lenders offering home equity loans, HELOCs, mortgage refinancing, and personal loans — Various
  6. What Causes Sprawl? — National Center for Policy Analysis
  7. Airbnb Host Review — SuperMoney
  8. Best 10 Money-Making Home Improvements — SuperMoney
  9. Best Home Equity Loans — SuperMoney
  10. Compare HELOC Rates — SuperMoney
  11. Fixed-Rate HELOC: How Does It Work? — SuperMoney
  12. Home Improvement Financing: How to Finance a Home Renovation — SuperMoney
  13. How to Improve Your Credit Score — SuperMoney
  14. How to Invest in Airbnb Rental Properties — SuperMoney
  15. Running an Airbnb? Here’s Everything You Need to Know Airbnb Insurance — SuperMoney