I think we're going to have a 2 story addition built to our house and
possibly finish the basement. My understanding is that as far as financing
is concerned there are 2 ways to go. We could get a home equity loan or
line of credit or we could do a refinance our mortgage with cashout. Any
What are the plusses and minuses of each way? Also, do either of these ways
allow the appraiser or the bank to take into consideration the final value
of the house *after* the addition/renovation is complete? That would allow
us to have more equity in our home and then potentially a larger loan.
Depends on your present interest rate, present terms, income backet, equity,
etc. Unless you want to post all of your finances, it is not possible to
say what will work best for you.
Also, do either of these ways
How much larger and why? If the bank gives you enough money to do the
improvements that covers immediate cost. You surely don't want a 15 year
mortgage on a trip to the Bahamas for vacation. But only you know your
entire financial picture.
As to other methods, there are plenty. Ask Daddy, buy a lottery ticket,
invest in slot machines, become a pimp. Or just save up and pay cash.
Talk to the people who hold your current loan and at least one other.
Tell them what you want to do and ask them. There are a lot of different
factors that go into the mix to come up with an answer, including the
details of your current loan, current loan rates, your credit history, age,
other financial plans and your ability to pay.
You pretty much summed your options up. The only other one I can think of
is paying cash.
Refinancing primary mortgages is often pretty expensive, you face closing
costs and points which could end up costing you thousands. Taking out a
second mortgage may be cheaper fee wise, but you may pay a slightly higher
interest rate. You really need to talk to a few lenders to see what your
best options are.
I have no idea if you can borrow against potential equity or not. Another
question for you lender.
I suspect a lot has to do with how much equity you currently have, what your
current incomes are, and how good your credit is.
Lots of other ways (cash, credit card, personal loans...), but those 3 are
probably the best for the purpose.
If you refinance and cash out, you will pay for the renovation for 30 years (or
the life of the mortgage). However, if you are planning to refinance a
high-cost mortgage anyhow, that may be a good option.
If you get a home equity loan or line of credit, you may opt for a shorter term
with higher payments for the renovations, and get back to just the basic
mortgage cost after that.
If you want a fixed amount for a single immediate purpose, the home equity
loan is probably the way to go.
If you want flexibility in time, payments, and access to the $$, the HE line
of credit is probably better.
In any case, the specific amount available and cost of each option depends on
the lender. Shop around at several banks, credit unions, and/or mortgage
brokers. Your credit union will likely have the lowest cost and best terms.
Banks that deal regularly in construction lending will have the
easiest time dealing with a situation in which you are borrowing in
order to make a large addition. It's not unusual in that kind of loan
to be borrowing money that will put you upside-down until construction
is finished. But banks that only do conventional home equity loans and
cash-out refis won't know what to do with it; that's why you need a
bank that knows construction lending.
Be prepared to deal with extra bureaucracy such as fund control when
you do this: the bank is within its rights to make sure that a loan to
fund construction is spent on construction and that the general
contractor is keeping his vendors and subs paid properly.
Been there, done that, still living in it 12 years later,
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