The Best Loan Options for Building a New Garage

Adding a garage to your property can be a great way to increase storage, provide shelter for vehicles, and even boost your home’s value. However, building a new garage requires a significant financial investment. If you don’t have the cash to pay for the project upfront, financing the build through a loan is a smart option.

In this article, I’ll walk through the pros and cons of the most common loan types used for garage construction projects and provide tips on choosing the best loan for your needs.

Overview of Garage Building Loan Options

Here are the main loan types to consider for financing the construction of a new detached garage:

• Personal loans – Unsecured fixed-rate loans from banks/online lenders, offering set monthly payments and quick funding. Loan amounts usually $1k – $50k.
• Home equity loans – Loans using your home equity as collateral. Allow you to borrow up to 85% of your home’s value minus what you owe on your mortgage. Come with higher fees/closing costs than personal loans.
• Home equity lines of credit (HELOCs) – Revolving lines of credit using your home as collateral. Flexible borrowing up to your available home equity, but variable interest rates.
• Cash-out refinance – Refinancing your mortgage to a higher loan amount to access equity, with funds usable on any purpose like a garage build. Involves refinancing process with costs/fees.
• FHA 203(k) rehab loan – FHA-backed renovation loan covering garage additions; requires meeting health/safety standards. More complex application.

Now let’s explore the pros and cons of each loan type in more detail.

Personal Loans

Personal loans tend to be one of the easiest and quickest garage financing options.

Pros

• Fast funding – can receive funds in as little as 1-3 business days after approval
• Fixed monthly payments
• Unsecured – no collateral required
• Online application and funding – no need to visit a bank branch
• Competitive rates – often lower than credit cards
• Flexible terms – can find loans with repayment terms from 1 to 7 years

Cons

• Lower maximum loan amounts – usually up to $50k
• Rates depend heavily on your credit score and history
• Late fees and penalties if you miss payments

Personal loans work best for smaller to mid-sized garage projects under $50,000. They provide flexible fixed-rate financing without using your home as collateral. Just be sure to only borrow what you can reasonably afford to repay.

Home Equity Loans

Home equity loans allow you to borrow against the existing equity in your home.

Pros

• Higher loan amounts – can borrow up to 85% of your home’s value
• Potentially lower interest rates – depends on loan-to-value ratio and credit score
• Fixed interest rate and payments
• Interest may be tax deductible – consult a tax pro

Cons

• Home is used as collateral – risk of foreclosure
• Minimum credit score requirements – often 680+
• Loan origination, appraisal, and other fees – closing costs upwards of 4%
• Slower process – can take 30-60 days to fund

If you need to finance a large garage project and have substantial home equity, a home equity loan provides an option with no maximum loan cap. However, the lending process is slower you’ll pay closing costs and your home is at risk if you default.

HELOCs

HELOCs function as revolving lines of credit secured by your home equity.

Pros

• Access to a line of credit up to your available home equity
• Only pay interest on what you use – can draw incrementally
• Typically variable interest rates – potential for lower rates

Cons

• Variable rates – potential for rate hikes over time
• Home used as collateral – foreclosure risk
• Closing costs of around 2-5%
• HELOC limits often lower than home equity loan options
• Drawing period followed by repayment period

HELOCs give flexibility to access home equity as needed for a garage project, but they come with variable rates and limits on the draw period. Manage risks by not borrowing more than you can repay before rates potentially rise.

Cash-Out Refinance

With a cash-out refinance, you refinance your existing mortgage to tap equity, with the funds useable on any purpose.

Pros

• Access to substantial funds – up to 80% of your home equity
• Opportunity to get a lower mortgage rate
• Consolidates garage funding within main home loan

Cons

• Costs/fees similar to a traditional mortgage – up to 5%
• Risk of higher mortgage payment if not rate/term refi
• Lengthy process – 4-8 weeks to close

If your goal is getting the lowest possible rate or folding a garage into your main mortgage, a cash-out refi is an option. But only pursue it if you get a lower rate or plan to stay in the home long term – otherwise the costs may not justify it.

FHA 203(k) Rehab Loan

FHA 203(k) loans are specifically designed for financing home renovations and additions, including garages.

Pros

• Loan product designed for home improvements
• Can wrap purchase + rehab into one loan

Cons

• Strict criteria – garage must meet FHA health and safety standards
• More complex application process – higher denial risk
• Must use FHA-approved contractors
• Maximum loan amount limits

203(k) loans make sense if you want a consolidation loan for a garage as part of a wider renovation project. But the application process is strict, so ensure you meet all requirements before applying.

Tips for Choosing the Best Garage Loan

With an overview of the main garage financing options, here are some tips to select the right loan for your situation:

• Compare loan costs – Calculate the total interest and fees paid over the loan term for each option. Lower total costs are better.
• Consider loan amount needs – Make sure the loan you choose provides sufficient funds for your garage project.
• Weigh rates vs. fees – Sometimes a lower rate carries higher fees and vice versa. Find the right balance.
• Check if you meet requirements – Confirm you meet key criteria like minimum credit scores and home equity levels.
• Compare loan term flexibility – Look for a loan term aligned with how quickly you plan to repay the debt.
• Understand risks – Be aware of potential downsides like variable rates or collateral requirements.

Doing your homework by researching multiple garage construction loans rather than going with the first option can pay off with significant savings.

Estimate Your Garage Building Costs

Before applying for a loan, it’s critical that you estimate expected costs for your garage project. Key costs to factor in include:

• Size of the garage
• Type of garage – detached vs attached
• Garage features – windows, insulation, electrical, plumbing, etc
• Building materials for the structure and roof
• Garage doors and openers
• Whether you’ll do finishing work like drywall and paint
• Excavation, concrete slab, and site prep work
• Demolition costs if replacing an existing garage
• Permits and insurance
• Hiring contractors vs doing self-financed work

I recommend getting multiple bids from contractors to help estimate costs. Online cost calculator tools can also provide ballpark estimates based on your garage specifications. Build in a 10-20% cushion for unexpected overages too.

Accurately estimating project costs will allow you to borrow the right loan amount without coming up short or over-borrowing.

How Much Value Does a Garage Add?

A major motivation for building a new garage is boosting your home’s resale value. But how much extra value does a garage actually add?

According to real estate professionals, key factors determine the value boost a new garage provides:

• Garage type – Attached garages tend to add more value than detached garages, especially when considering future buyers.

• Quality and size – Nicer and bigger garages add more value. Two-car garages are ideal over one-car.

• Location – Garages connected or with access inside add more value than those only with exterior access.

• Comparable homes – Nearby comparable homes set expectations. Your market may expect garages standard.

• Overall demand – Garages add value in cold climates but may matter less in warmer areas with no snow.

In terms of the financial value added, the key is whether the garage directly increases livable square footage for the home. A standard two-car attached garage adds about 5-10% to a home’s total value according to most estimates.

With the right location and features, you may recoup 60-80% of your garage construction costs through added home value. But a poorly designed or low-quality garage may add little benefit, so focus on maximizing quality within your budget.

Which Loan is the Best for Building a Garage?

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