Financing a remodel

PaigeTNovember 14, 2012

This is my first time to post on this forum, please forgive me if I ask a question that has already been answered.

My husband and I have recently inherited our grandmother's home. It was built in 1955, and has not had many updates since. There is currently no mortgage or liens on the home. We would like to do a significant remodel on the home, adding square footage in the attic, and adding a garage. Cost of reno between 200K and 250K. The current value of the home is 340K. After reno, square footage would be about 3400. Homes in the neighborhood are selling for 150-170$ per sqft. Our question is, what is the best option for financing the large remodel. Is a new mortgage possible on an inherited home?

Our plan is to live in the home forever. As long as that may be.

Any thoughts or recommendations?

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You can certainly place a mortgage on your inherited home However you will need to meet underwriting criteria such as sufficient and reliable income to repay the mortgage.

    Bookmark   November 14, 2012 at 6:34PM
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Double check your estimates. They sound pretty low for what you are describing. In situations like yours with a smaller older home that you are trying to "recreate" to modern standards, such as adding a second story, creating an open concept or higher ceilings that involve a lot of structural changes, it is often dollars ahead to do a teardown instead. Remember that in such an involved remodel that you will have to bring many many things up to current building code standards such as wiring and insulation. Retrofitting that and joining new to old is where the big costs come in.

40 year old updated homes do not appraise nearly as well as do brand new homes with the same amenities, so the bank will take that into consideration when evaluating the situation. You should too. And yes, you will need to qualify for a mortgage after the bank has appraised the place as well as given a conditional appraisal based on it's possible future selling price after you are done. Don't go into anything like this blinded by an emotional attachment to the place. It can cost you. In other words, if this place wasn't "free", first of all, would you buy it? How about would you buy it for 300K and sink another 300K into it?

    Bookmark   November 15, 2012 at 7:07PM
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Well, that is a lot of money to put into a house (200-250k into a house worth 340k is a huge percentage on a remodel).

If you sold the house for $300k and added $250k, you'd be at $550k. Have you looked at what is on the market for $550-$600k?

I say this as someone who put $110k of renovation into a house worth $350k. We paid cash for the work, and before we did that we spent about a year looking for something else to buy (even looked at tear downs to just start over). In our market we could have gotten a bigger house or a better town, but couldn't find what we wanted (and wound up creating). We wanted a ~2000 sq ft house that was updated and on a good sized lot in our current town (low property taxes).

In our case, low housing inventory worked against us. So we stayed here (great lot, easy commuting location) and updated this house. But by the numbers, it was a bad choice. We refinanced afterwards because the rates dropped so much and our $110k renovation only added $75k in value (so now the house is worth $425k). Honestly, I was surprised it added that much. I knew it was a money losing game from the get-go.

So my advice is, unless you are also in a market where land is scarce and most of the housing stock is dated and in need of repair ... You will probably wind up ahead if you sell the inherited house and buy something else.

The only other exception is if you are a meddler by nature and would have a hard time NOT changing a house. I am a meddler, and I admit it. It sounds sick (and probably is in some psychiatric diagnosis manual somewhere) but I actually enjoy home improvement, I lived in a new house once and hated it. I think of it as helping my house "reach its potential" (God, how I hated hearing that phrase used on me in school).

So, if you have a similar sickness then either get cured or start saving money to do the renovations in cash. If you live in the house rent-free, you can save a ton of money each month and accumulate enough to tackle a big project each year. Best of luck to you!

    Bookmark   November 15, 2012 at 10:34PM
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