Compare the most common ways to fund your build and learn how each one affects your process
How You Pay Shapes How You Build
Whether you’re building from the ground up, remodeling, or adding on to an existing home, how you fund your project will directly affect how you plan, design, and move forward. Your financing path influences your timeline, contractor agreements, and even what documentation you’ll need at each stage.
This page outlines the most common options for residential construction financing and what to keep in mind as you choose the best path for your situation.
Common Financing Methods
Construction Loan
A construction loan is a short-term, interest-only loan specifically designed to finance the building of a new home or major renovation. It’s typically structured in two parts:
- The construction phase – During this time, you draw money from the loan in segments (called “draws”) as work is completed. Each draw is tied to milestones in the construction process (e.g., foundation complete, framing complete).
- The permanent phase – Once the project is complete, the loan either converts into a long-term mortgage or is paid off with another loan.
Key features:
- Requires full construction documents, including architectural plans, permits, and a signed contractor agreement
- Lender often requires a licensed general contractor; owner-builders may have limited options
- Each draw may require inspections, lien releases, and approval before funds are released
- Typically interest-only during the build, switching to principal + interest when the permanent loan kicks in
Best for: full custom homes, ground-up ADUs, large additions, or major renovations where work will be done continuously under a licensed contractor
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger mortgage. The difference between the new loan and what you still owe on your old loan is given to you as a lump sum, which you can use for your project.
Key features:
- Requires sufficient equity in your home, lenders typically allow you to refinance up to 75–80% of your home’s appraised value
- Results in a new mortgage with updated interest rate and terms (which may be higher or lower than your current loan)
- No phased funding, you receive the funds all at once at closing
- Typically used to fund additions, kitchen or bath remodels, or ADUs
Considerations:
- You’ll need to requalify for the new loan (credit check, income verification, appraisal)
- Can extend your mortgage term or increase your monthly payment
- Not ideal for major ground-up builds that require staged funding or involve higher lender oversight
Best for: project owners with strong equity looking to fund a moderate-to-large project without a new construction loan structure
HELOC (Home Equity Line of Credit)
A Home Equity Line of Credit works like a credit card secured by your home. You’re approved for a credit limit based on the value of your home and how much equity you have.
Key features:
- Flexible: draw only what you need, when you need it
- Interest-only payments during the draw period (usually 5–10 years)
- Can be used to pay for design, permitting, and phased construction work
- Quick to set up compared to other financing options—often just a few weeks
Considerations:
- Variable interest rates may rise over time
- The loan is secured by your home, so default carries foreclosure risk
- Not ideal for large, complex projects that require upfront funding guarantees or staged draws tied to contractor payments
Best for: remodels, phased projects, or smaller builds like interior renovations or detached ADUs
Cash / Self-Funded
Paying for the project with your own cash gives you the most control and flexibility. You don’t have to work around draw schedules or lender timelines, and you can adapt scope as needed.
Key features:
- No lender approval, fees, or draw delays
- Freedom to start, pause, or modify scope on your own terms
- Particularly useful if you’re managing design and construction yourself or acting as an owner-builder
Considerations:
- It’s easy to go over budget without formal constraints, so clear planning and budgeting are still essential
- Some contractors prefer projects with formal financial oversight (like construction loans)
- No protections or oversight that come with lender involvement (inspections, disbursement control)
Best for: smaller-scale projects, project owners with liquid reserves, or those who want to self-manage the process at their own pace
Things to Consider When Choosing a Financing Option
There’s no one-size-fits-all approach to construction financing. The right solution depends on your project type, how quickly you want to start, how fixed your design is, and your comfort with different funding structures. Below are the key factors to think through as you compare options:
1. Project Type and Scope
The size and complexity of your project may limit or expand your financing choices.
- Ground-up builds or major remodels usually require construction loans, which offer phased funding and lender oversight.
- Additions, kitchen/bath remodels, and ADUs can often be financed through a HELOC, cash-out refinance, or personal funds.
- Smaller or phased projects might be better suited to flexible options like HELOCs or self-funding, where scope can evolve over time.
Ask yourself:
- Will this project be completed all at once, or in phases?
- How complex or structural is the work?
- Does the total scope justify the cost and complexity of a formal construction loan?
2. Timeline to Start
Some financing options can be secured quickly, while others take time to process and require documentation that may not be ready yet.
- Construction loans typically take 4–8+ weeks to close and often require permit-ready plans and signed construction contracts.
- HELOCs and cash-out refis are usually faster (2–4 weeks) and may be based on your existing home value rather than project-specific scope.
- Cash-funded projects can move forward immediately, depending only on your planning and contractor availability.
Ask yourself:
- When do I want to break ground?
- Are my plans and permits ready, or will funding need to wait?
- Can I afford to delay design or bidding to align with a loan approval timeline?
3. Scope Certainty vs. Flexibility
Some financing types work better when your scope is fixed. Others are better if you’re still figuring things out.
- Construction loans require a locked scope and budget to be approved; significant changes later can be difficult or costly.
- HELOCs and cash-funded approaches give you more room to change your mind, phase work, or take longer to decide on details.
- Cash-out refinances offer a lump sum that you can allocate at your discretion, assuming it covers the full scope.
Ask yourself:
- Is my project fully planned, or am I still developing the scope?
- Will I want to upgrade finishes or expand later?
- Do I want flexibility to spend differently than originally expected?
4. Soft Cost Coverage
Many financing options only release funds once construction begins, meaning you may need to pay for early-stage costs out-of-pocket.
- Design, engineering, permitting, and surveys often happen before any loan funds are available.
- Some construction loans allow soft cost draws, but only with documentation and inspections.
- HELOCs and cash-out refinances are more flexible and often better for covering pre-construction expenses.
Ask yourself:
- Can I cover early costs out of pocket?
- Does my financing option include pre-construction work like design and permitting?
5. Draw Schedule and Oversight
If your project will rely on phased funding, understand how and when you’ll receive money from the lender.
- Construction loans release funds in draws tied to completed work, typically verified by an inspector or appraiser.
- Draw delays can impact your project if you’re waiting on funds to pay trades or order materials.
- HELOCs and cash-out refinance provide more immediate liquidity, giving you more flexibility to pay as you go.
Ask yourself:
- Will I need to wait for a bank to release funds before paying my contractor?
- What documentation will I need for each draw?
- Do I have the reserves to float expenses between draws?
6. Long-Term Impact on Your Finances
Every loan type has a different effect on your financial picture.
- Construction loans convert into long-term mortgages with new terms.
- Refinancing may reduce or increase your monthly payments depending on rates and balance.
- HELOCs may adjust over time, with variable interest rates or repayment requirements.
- Cash funding avoids debt, but drains liquidity and may reduce future flexibility.
Ask yourself:
- What monthly payment am I comfortable with after the project?
- How will this impact other goals, savings, retirement, and emergencies?
- Do I need to preserve cash reserves for other expenses?
Where to Find the Right Lender or Financing Partner
Once you’ve decided which type of financing best fits your project, the next step is finding a lender that offers it and understands the unique needs of construction.
Construction Loans
Not all banks offer construction loans, and even among those that do, the terms and approval processes can vary significantly.
Where to look:
- Local or regional banks and credit unions – These institutions often understand local permitting processes and construction timelines and may have relationships with local builders.
- Larger mortgage lenders with construction loan departments – Many national banks offer construction-to-permanent loan options with competitive rates, though they may be stricter about documentation.
- Builders’ preferred lenders – Some general contractors have relationships with lenders who are familiar with their pricing and scope formats, which can make approval smoother.
What to ask:
- Do you offer construction-to-permanent loans?
- Do you fund soft costs (design, permits) before construction begins?
- How are draws structured and approved?
- Do you require a licensed contractor and permit-ready plans?
Cash-Out Refinance
Most mainstream lenders, mortgage brokers, and banks offer refinance options, and the cash-out variant is a common tool for project owners with significant equity.
Where to look:
- Your current mortgage lender – They may offer streamlined refinance options or loyalty incentives.
- Mortgage brokers – Brokers can compare loan products across multiple institutions to find you the best terms.
- Online rate marketplaces – Sites like LendingTree, Better, or Bankrate let you shop refinance offers and compare terms easily.
What to ask:
- What is the maximum loan-to-value (LTV) ratio?
- What will my new monthly payment be?
- Are there prepayment penalties or closing costs?
- How quickly can funds be disbursed?
HELOC (Home Equity Line of Credit)
HELOCs are widely available and relatively fast to set up, making them a popular choice for mid-size remodels and additions.
Where to look:
- Your bank or credit union – If you already have an account, applying may be faster and come with better terms.
- Mortgage lenders – Many mortgage companies also offer HELOCs alongside traditional products.
- Online banks and fintech platforms – Some newer providers offer HELOCs with digital applications and fast approvals.
What to ask:
- What is the draw period and repayment structure?
- Is the interest rate fixed or variable?
- What is the max LTV and minimum credit score required?
- Are there usage restrictions or penalties for early payoff?
Cash / Self-Funded
If you’re using cash, the key isn’t finding a lender—it’s staying organized and protecting your liquidity.
Tips for managing a self-funded project:
- Use a separate checking account for project expenses to track spending clearly.
- Set clear budgets and approval limits for yourself or your partner.
- Work with a CPA or financial planner to ensure this doesn’t disrupt long-term financial goals.
- Consider phasing the work or pausing between phases to manage cash flow more effectively.
Before choosing any lender, read the fine print, compare rates and terms, and make sure the provider understands residential construction projects specifically, not just traditional mortgages. You’ll avoid a lot of delays and confusion by working with a lender who’s familiar with permitting timelines, staged draws, and local construction norms.
When to Involve Financing in the Pre-Construction Timeline
Getting pre-approved for financing early in the process can save time, shape smarter decisions, and help prevent design work that doesn’t match your funding capacity.
Here’s how financing fits into the pre-construction timeline:
- At the Start: Get Pre-Approved Early
- Before design or planning begins, talk to a lender and get pre-approved based on your financials, credit, and goals.
- This gives you a realistic budget ceiling and may influence whether your project is designed as a full build, addition, or phased remodel.
- Pre-approval can also help you better evaluate which design professionals and contractors fit within your budget range.
- During Preliminary Design & Budgeting
- Knowing your loan limits helps avoid scope creep or planning for a project that can’t be financed.
- Early pre-approval also gives your design team a concrete budget to work from, allowing them to make informed decisions about size, complexity, and finish levels.
- When Plans and Scope Are Defined
- Once your project has preliminary plans and a working budget, begin the full loan application process.
- Many lenders will want stamped plans, a construction timeline, and a signed contractor proposal for final approval.
- Before Permits or Construction Start
- Your financing should be fully secured before permits are pulled and construction begins.
- Confirm your lender is ready to release the first draw, and that all loan conditions have been met.
Get pre-approved early, well before design is complete, so your budget, team, and planning process are aligned with what you can actually fund. This will save time, reduce revisions, and help avoid costly surprises later in the process.
What’s Next: Planning & Feasibility
Now that you’ve explored how to fund your project and set a working budget, the next step is understanding what makes a project viable from a planning and site standpoint.
In this next section, we’ll walk through what affects whether a project can be built, like zoning rules, site conditions, permitting timelines, and local land use requirements. You’ll get a clearer picture of how cities and counties review projects, what kinds of restrictions might apply, and how these factors can shape scope, design, and timeline.
Continue to the Planning & Feasibility Overview to get familiar with how projects move from an idea to a permitted reality and how to prepare for that next step.