Best way to pay for a home additon/renovation????

[BRN]

Hi all,

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 other way?

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.

TIA

Bart

[Edwin Pawlowski]

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. Ed

[Joseph Meehan]

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.

[DaveG]

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.

Dave

[Christopher Green]

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.

[John R Weiss]

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.