Home equity line of credit or refinance

lisapicoFebruary 4, 2008

We are going to be undergoing a major remodel costs of which will hover between $150-160. We are six years into a 15 year loan and have paid off all but $150. Which would be the best way to go given the way the economy is going?

We would like to pay off the loan within 5-6 years if all goes well with my husband's company. Usually he gets an end of the year bonus (last year it was his entire's year salary) but the forecast is grim for the next little while. Any advise would be appreciated.

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What's the interest for each? Penalities? Do you plan to stay there for the long term?

    Bookmark   February 5, 2008 at 12:08AM
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The answer largely depends on the interest rate of your first mortgage and the amount of equity that you have in your home. You didn't tell us either.

If you can refinance your current mortgage at a lower APR than your current APR AND can pull out enough equity to cover your remodeling costs, get a new 15 year mortgage that includes the money that you'll need for remodeling. If your current mortgage APR is less than the APR of a new mortgage AND you can pull out enough equity to cover your remodeling costs, keep your current mortgage and get either a second mortgage or a HELOC to cover remodeling costs.

If you do not have enough equity in your home to cover remodeling costs, you'll probably need to get a construction loan. When construction is completed, compare current interest rates and determine whether a new first mortgage or a second mortgage or a HELOC is the best way to pay off your construction loan using the information presented in the second paragraph.

If you finance your remodeling with either a first or second mortgage, keep the excess funds in a money market account or other high rate interest bearing account until the funds are needed for construction. If you get a HELOC, simply withdraw the funds as needed.

I've highlighted some of the key considerations but during the process I've made some assumptions and used too many "ifs". I suggest that you visit a few local mortgage lenders and ask for advice. After you gather more information you can get second opinions here.

It sounds like a great project. Enjoy the journey!

    Bookmark   February 5, 2008 at 12:28AM
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Thanks for the info. We are currently paying 5% on our mortgage and are almost six years into it. We have about $110k of equity. Does that info help?

    Bookmark   February 5, 2008 at 10:38AM
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Since the amount that you need for the remodel is more than your equity, you're only option may be a construction loan. With most construction loans, you receive additional funds after reaching previously determined construction milestones. For instance, completion of rough grading and the basement/foundation/slab poured.

Your home's value will increase after you complete the remodel. You can then either get a new first mortgage, a second mortgage, or a HELOC depending on the interest rates at the time. Use those proceeds to payoff your construction loan.

In addition to speaking with a lender, I suggest that you discuss your plans with a real estate broker. Some remodeling projects return 75 cents or less on the dollar. A broker can give you an approximation of the return for your project.

    Bookmark   February 5, 2008 at 11:21AM
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