Let’s
see. Do I want to refinance now or wait until I finish with
my home improvements? Or do I go ahead and get a construction
loan, complete my addition, then refinance both my mortgages
when the addition is complete? Do I need the value of my new
addition to increase my appraised value? These are questions
many in America area asking, improve now or refinance now?
Why not do both?
Historically, when one wanted to use the equity
in their home for home improvements there were two distinct
ways. Obtain an equity loan based upon current appraised value
or get some building plans and specifications together, along
with a contractor’s bid and get a construction loan.
What are the differences?
First, let’s look at the similarities.
Both are usually second mortgage loans. Liens that subordinate
to a current first mortgage. The equity loan is based upon
the current market value of the home and the construction
loan may use the “as finished” value of the home.
That’s the value of the house after the improvements
have been completed. It’s common during a major remodel
of a home to have the cost of construction to surpass the
current value of the property. And without any equity in the
home, lenders aren’t as inclined to offer their best
programs when someone is automatically “upside down”
with regards to value.
Many times, second mortgages will carry a higher
rate than a first mortgage or in the instance of an equity
loan or line of credit the interest rate itself will be an
adjustable one. Low now, but higher later.
That presents a problem. If you elect to take
a construction or equity loan, then that rate may be higher
than what’s currently available for a first mortgage
refinance. And if your construction period will last for two
or three months, then there’s no guarantee that interest
rates will be where they are now. You run the risk of getting
a construction loan while keeping your fingers crossed that
interest rates stay low. At least until you have time to build
on your house and refinance your new note. Until now.
Some lenders offer a mortgage refinance that
does both. Refinance a current first mortgage into a lower
rate while at the same time borrowing enough for home improvements.
How is this done? Both Fannie Mae and Freddie Mac have programs
that allow for a homeowner to refinance their current mortgage
using today’s low fixed rates while at the same time
borrowing still more money for home improvements. Again at
today’s low rates, not at higher or variable construction
loan terms.
Article continued at http://realtytimes.com/rtcpages/20030320_remodelrefi.htm
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