Refinance and Remodel Your Home

Stuck between the options to go for a refinance or to hold back until home improvements are done? You might possibly be considering a construction loan as well to complete your addition, and then later refinance your mortgage. But there once again, you may feel stuck; should the value of your new addition exceed your appraised value? So, the bottom line is to go for improvement or refinancing? How about if we tell you that you could go for both!

Earlier, there were two distinct ways which people would opt for when they wanted to utilize the equity of their houses for house improvements. Based on their current appraised value, they’d obtain an equity loan. Or put some construction plans and specifications together, include some contractor’s bid and acquire a construction loan.

If you look at it, both the ways fall under second mortgage loans.

The amount for equity loans are based upon the ongoing market value of the home, and the construction loans are mostly set according to the “as finished” value of the home. In simpler terms, that’s the value of the home after the improvement work is done. We all know that while doing a major remodeling of a house, often the construction costs surpass the property’s current value. And when that happens, due to the absence of any equity in the home, lenders are not the party to offer their best programs.

Rates on second mortgages are often higher than the rates on a first mortgage. Also, in the instance of a line of credit or an equity loan, the interest rate is never stable. Initially, it’s lower but later it starts climbing higher. Problematic!

Then, if you were to acquire a construction loan or equity loan, the rates would be mostly higher than your current first mortgage finance. And if the construction phase goes on for two to three months, you can’t count on the interest rate to stay where it was earlier.

Problems, problems, problems… But not anymore.

There are lenders who offer a mortgage finance, which takes care of both the issues. You can now not only refinance a current first mortgage into a lower rate, but also simultaneously borrow more for home improvement. All at today’s lower rates, avoiding higher rates and variable construction loan terms. Fascinating!  

So, let’s say, you are looking forward to add an extra bedroom or an extra floor as an improvement to your home. For example, your current mortgage is somewhere $180,000 while the appraise amount for your house is at Rs. $200,000. Not much scope for equity loan here. The improvement you have in mind will cost $100,000. So after the completion of construction work your new value will be somewhere close to $300,000. Now, thanks to the new mortgage programs, you can borrow funds for your dream home improvements using the “future” appraised value of your renovated home, along with all the equity that follows with it. Plus, the refinance will be available at competitive rates. Exciting, huh?

However, the ratio of these lenders is low. You might have to check with a lot of lenders to come across the ones with the new programs. But to get a construction loan along with a regular finance is worth the effort. So don’t let old experiences stop you anymore from transforming your house into your dream house.