Home Addition Financing

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boston85
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Home Addition Financing

Post by boston85 » Sun Jan 06, 2019 10:19 am

We currently live in a ranch and are in discussions to add a second floor on to our house. While we haven't received the quote yet, I am anticipating this coming in around $250,000 - $300,000 (hopefully closer to the $250,000 mark). My dilemma is how best to pay for it. I am currently 4 years into a 30 year fixed at 3.625%. Around $330,000 remaining on the loan. I have just assumed that I would do a construction loan for the addition, and then roll everything into a new mortgage. I am just having a hard time thinking about having to roll the existing $330k at 3.625% into something that is going to be closer to 4.5%.

A pretty reasonable appraisal value with 85% for a home loan would get me about $140,000. By the time I am ready to do this construction (June 2019) I would probably be able to kick in $75,000 cash which still leaves me a good balance in savings. I don't want to deplete my entire savings balance. That means I would have around $225k (can probably find another $10k to get to 225k) available to me without having to touch my existing mortgage at the lower amount. It is then the other $50k or so that I am not sure what to do about. Options are a 401k loan or personal loan. In either case, I would be able to pay off the personal loan within 12 months, so even if that interest rate is higher, it wouldn't be for long.

I know I could just save up and pay cash if I wait 2 more years to do the addition, but with 2 growing kids, we just need the space as soon as we can get it. As I see it, below are the main options I have.

1.) Construction Loan - assuming a total balance of $580k ($330k existing + $200k addition, which factors in cash down payment) would be financed around 4.5% 30 year, which would be a monthly payment increase of around $1300 per month (mortgage and property tax increase included). Benefit here is It is all locked in at a still historically low rate, but I then am basically moving $330k from 3.625% to 4.5%.

2.) Home Equity Loan + Cash - assuming a home equity loan of around $140,000 would be a rate of around 6.45%. This would be a monthly payment of around $850 over 30 years. I then would have to figure out what to do about the $50k shortfall in cash that I would have. Again I could do a personal loan, but assuming a 6 year loan at 10% for $50k would be a monthly payment of around $900. I could pay off that loan in a year though.

While it is hard to grasp rolling the existing mortgage to almost an entire percentage point higher, it still is a ridiculously low historical rate, so I am thinking I should just go that route and plan to pay off the mortgage in 15 years or so rather than the 30. With a current mortgage payment of $1640, if I just re-financed my existing balance at 4.5%, it would only raise the monthly payment by $30 a month, which really is nothing.

chevca
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Re: Home Addition Financing

Post by chevca » Sun Jan 06, 2019 10:36 am

Why not just move to a different house that fits your needs? Where will you live when your ranch doesn't have a roof for however long?

It seems like the easier route would be to just sell the ranch and get a different house.

Ron
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Re: Home Addition Financing

Post by Ron » Sun Jan 06, 2019 10:44 am

chevca wrote:
Sun Jan 06, 2019 10:36 am
Why not just move to a different house that fits your needs? Where will you live when your ranch doesn't have a roof for however long?

It seems like the easier route would be to just sell the ranch and get a different house.
That's exactly what we did, when we considered upgrading major portions of our previous house.

The price of the upgrades, along with the current value of the home led us to build a new home with the features we wanted. An additional benefit (for us) was moving five miles but getting much less realty tax bills compared to our old home.

We were/are more than satisfied going that route, FWIW.

- Ron

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boston85
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Re: Home Addition Financing

Post by boston85 » Sun Jan 06, 2019 10:53 am

We did a lot of analysis on moving vs. addition. We want to stay in our town. Property taxes are 20-30% lower here than almost all surrounding towns. Also, we are in a perfect spot with dead end street and level flat lawn with plenty of usable space. If we were to move in the same town, we would be looking at $1M minimum for the type of house we want, and even at that, the new construction houses do not have great lots. An addition, even a sizeable one, still let's us have a mortgage under $550k, which is significantly less than we would have if we purchased a new home. Plus, the addition let's us get about 90% of what we really would want/need in a house.

chevca
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Re: Home Addition Financing

Post by chevca » Sun Jan 06, 2019 10:58 am

Okay, that makes sense.

I would go the save up and pay cash in a couple years route then. Or, the HELOC or some loan and pay that off ASAP. It's a good idea nowadays to hang onto that 3.625% mortgage, IMO.

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Watty
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Re: Home Addition Financing

Post by Watty » Sun Jan 06, 2019 11:31 am

chevca wrote:
Sun Jan 06, 2019 10:36 am
Why not just move to a different house that fits your needs? Where will you live when your ranch doesn't have a roof for however long?

It seems like the easier route would be to just sell the ranch and get a different house.
+1000

That would also save the cost of having to move somewhere else for a year and store most of your stuff for that year.

With major work like that your landscaping will be trashed people often forget to budget for that.

Another big problem is that you can put $300K into a house and only increase the home value by $100K. If you add 1,000 square feet but 250+ of that is eaten up by the stairs and hallways you may not be adding as much useful space as it sounds.

Single story ranch houses are VERY desirable in my area because of baby boomers looking for retirement homes so adding a second story to your house would in some ways make it less desirable. The value of your home when you look at the cost per square foot may go down because it is no longer a desirable ranch house.

One other problem is that if you spend a quarter of a million dollars to improve a 40 year house then when you are done you still have a 40 year old house.

That would also eliminate a lot of the uncertainty.

Few projects come in under budget.

Few projects come in ahead of schedule.

Some loans will not lock the interest rate until the construction is done.

You could have job or life changes halfway through the remodel.

Regattamom
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Re: Home Addition Financing

Post by Regattamom » Sun Jan 06, 2019 1:25 pm

Where will you live during the construction and at what cost?

unstartable
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Re: Home Addition Financing

Post by unstartable » Sun Jan 06, 2019 1:32 pm

Watty wrote:
Sun Jan 06, 2019 11:31 am

Single story ranch houses are VERY desirable in my area because of baby boomers looking for retirement homes so adding a second story to your house would in some ways make it less desirable. The value of your home when you look at the cost per square foot may go down because it is no longer a desirable ranch house.
This is highly dependent on area. Ranch homes in my area cost about 10% less per square foot than a colonial. Which is part of the reason I live in a ranch.

Topic Author
boston85
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Re: Home Addition Financing

Post by boston85 » Mon Jan 07, 2019 11:27 am

Watty wrote:
Sun Jan 06, 2019 11:31 am
chevca wrote:
Sun Jan 06, 2019 10:36 am
Why not just move to a different house that fits your needs? Where will you live when your ranch doesn't have a roof for however long?

It seems like the easier route would be to just sell the ranch and get a different house.
+1000

That would also save the cost of having to move somewhere else for a year and store most of your stuff for that year.

With major work like that your landscaping will be trashed people often forget to budget for that.

Another big problem is that you can put $300K into a house and only increase the home value by $100K. If you add 1,000 square feet but 250+ of that is eaten up by the stairs and hallways you may not be adding as much useful space as it sounds.

Single story ranch houses are VERY desirable in my area because of baby boomers looking for retirement homes so adding a second story to your house would in some ways make it less desirable. The value of your home when you look at the cost per square foot may go down because it is no longer a desirable ranch house.

One other problem is that if you spend a quarter of a million dollars to improve a 40 year house then when you are done you still have a 40 year old house.

That would also eliminate a lot of the uncertainty.

Few projects come in under budget.

Few projects come in ahead of schedule.

Some loans will not lock the interest rate until the construction is done.

You could have job or life changes halfway through the remodel.
I understand that part about not increasing the value the same amount as the addition, but I actually am not worried about that at all with where I live. Not that I think a $250,000 addition is going to increase my home value by $400,000, but if anything I will be very close to break even. I am going from a 3 bedroom 2 bath 1600 square foot home home to a 5 bedroom 3.5 bath 3000 square foot house with an office that will have a closet and technically could be a 6th bedroom if i wanted it to be. Also, I am still going to have a full guest suite with full bath on first floor, which will be appealing to those wanting a master on the first floor.

Topic Author
boston85
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Re: Home Addition Financing

Post by boston85 » Mon Jan 07, 2019 11:29 am

Regattamom wrote:
Sun Jan 06, 2019 1:25 pm
Where will you live during the construction and at what cost?
Our builder estimates this to be about a 3 month project. We plan on living in the house for as long as we can, then moving out for about a month. We have family close by that we can stay with in worst case scenario. Otherwise we plan on doing 1 month at a local residence hotel.

Topic Author
boston85
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Re: Home Addition Financing

Post by boston85 » Tue Jan 08, 2019 2:47 pm

So I am starting to think about this a bit different after researching other options. I am not wondering if a 401k loan would work. Between my wife and I, we could get $100k. We both have stable jobs that we have no intention of leaving soon. Also, this would be more of a bridge loan, as we could pay it back within a year, or 18 months at the absolute worst. I realize the future markets are uncertain, but I just don't see the marking sky rocketing up in 2019, so I don't think it is as if I would miss out on a 20% gain. Even if I did, it is only $10k in profit missed.

We could use $100k from 401k loan, kick in $75k-$100k in cash contribution, and then take the rest out in a HELOC or Home Loan. In terms of pay back, I would fully restore the 401k loan in a year, and then aggressively pay down the home loan over a couple of years. That lets us keep the existing mortgage at the low rate without having to touch it.

delamer
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Re: Home Addition Financing

Post by delamer » Tue Jan 08, 2019 3:42 pm

Have you considered refinancing to a 15 or 20 year loan?

If that is affordable, the interest bump would be lower.

JGoneRiding
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Re: Home Addition Financing

Post by JGoneRiding » Tue Jan 08, 2019 4:01 pm

Sounds like you have done your homework . I too was thinking just move :)

I would probable qualify and start the heloc about 3 months before the plan start date. Then I would pay as much in cash as I could, draw the heloc for what was needed to the max, and consider the 401k loan as a last ditch need. One issue is depending on how it is structured you may need to either pay it off in full or stuck with several years of payments, some allow continued contributions and some don't so need to look into that too as it would suck to miss out on match

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Watty
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Re: Home Addition Financing

Post by Watty » Tue Jan 08, 2019 4:52 pm

boston85 wrote:
Mon Jan 07, 2019 11:29 am
Our builder estimates this to be about a 3 month project. We plan on living in the house for as long as we can, then moving out for about a month.
I would be amazed if that was realistic for adding a second story to a house.

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Meg77
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Re: Home Addition Financing

Post by Meg77 » Tue Jan 08, 2019 5:01 pm

Banker here. Just get a home improvement loan! They are like a hybrid of a home equity and a construction loan. You don't have to roll it into your mortgage at the end of the construction - it can just remain a fully amortizing second lien. A lot of lenders won't do them if they don't also hold the first lien though, so start with your current mortgage company for a quote.

A HI loan allows you to get an "as complete" appraisal and bases the loan amount on (usually) 80% of that total valuation (first mortgage and HI loan would total a max of 80% of the total as complete appraised value). Some lenders may go up to 90% though. The rate will be higher as it's a second lien, and usually the amortization will be on a 15 year schedule after a 3-12 month interest only draw period. But you won't have to touch your first mortgage - which I wouldn't, given your current rate. If you need to bridge the gap, a 0% credit card or small unsecured loan might even be preferable to refinancing your whole home, since you could pay it off within a few years.

Good luck.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Topic Author
boston85
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Re: Home Addition Financing

Post by boston85 » Wed Jan 09, 2019 9:14 am

Meg77 wrote:
Tue Jan 08, 2019 5:01 pm
Banker here. Just get a home improvement loan! They are like a hybrid of a home equity and a construction loan. You don't have to roll it into your mortgage at the end of the construction - it can just remain a fully amortizing second lien. A lot of lenders won't do them if they don't also hold the first lien though, so start with your current mortgage company for a quote.

A HI loan allows you to get an "as complete" appraisal and bases the loan amount on (usually) 80% of that total valuation (first mortgage and HI loan would total a max of 80% of the total as complete appraised value). Some lenders may go up to 90% though. The rate will be higher as it's a second lien, and usually the amortization will be on a 15 year schedule after a 3-12 month interest only draw period. But you won't have to touch your first mortgage - which I wouldn't, given your current rate. If you need to bridge the gap, a 0% credit card or small unsecured loan might even be preferable to refinancing your whole home, since you could pay it off within a few years.

Good luck.
Thanks for that feedback. I didn't even think about the second lien. The bank I am going through, who I got my original mortgage with, sold that original mortgage to one of the large national banks. I suppose I could approach that large national bank and see what options the offer. The credit card option is another one I have thought of, but I don't think it is going to cover enough. Realistically I am going to need about $200k after the cash that I put down. I could get $125k or so of that from a HELOC or Home Loan, then that leaves $75k to figure out where to get it from.

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Meg77
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Re: Home Addition Financing

Post by Meg77 » Thu Jan 10, 2019 1:57 pm

boston85 wrote:
Wed Jan 09, 2019 9:14 am
Meg77 wrote:
Tue Jan 08, 2019 5:01 pm
Banker here. Just get a home improvement loan! They are like a hybrid of a home equity and a construction loan. You don't have to roll it into your mortgage at the end of the construction - it can just remain a fully amortizing second lien. A lot of lenders won't do them if they don't also hold the first lien though, so start with your current mortgage company for a quote.

A HI loan allows you to get an "as complete" appraisal and bases the loan amount on (usually) 80% of that total valuation (first mortgage and HI loan would total a max of 80% of the total as complete appraised value). Some lenders may go up to 90% though. The rate will be higher as it's a second lien, and usually the amortization will be on a 15 year schedule after a 3-12 month interest only draw period. But you won't have to touch your first mortgage - which I wouldn't, given your current rate. If you need to bridge the gap, a 0% credit card or small unsecured loan might even be preferable to refinancing your whole home, since you could pay it off within a few years.

Good luck.
Thanks for that feedback. I didn't even think about the second lien. The bank I am going through, who I got my original mortgage with, sold that original mortgage to one of the large national banks. I suppose I could approach that large national bank and see what options the offer. The credit card option is another one I have thought of, but I don't think it is going to cover enough. Realistically I am going to need about $200k after the cash that I put down. I could get $125k or so of that from a HELOC or Home Loan, then that leaves $75k to figure out where to get it from.
Usually when I have clients in your situation, I advise them to go with a home equity loan (a line is fine if they can pay it off in 1-3 years, but a term note is better and enables you to fix the rate if you plan to pay it off over 5-15 years). Home equity loans are cheaper and easier to get done and don't usually require a new title policy, inspections to make sure the work is being done, and so on. However the benefit of a home improvement loan is specifically that it enables you to borrow against the as complete value of the home after the work is done. With a home equity loan you're capped at 80% of the current value. If you're just doing cosmetic improvements, usually an as complete appraisal won't reflect much of a value increase, so the extra cost/hassle of the HI loan isn't worth it. But if you're adding square footage it should, and that's when a true HI loan can make a lot of sense.

For an extra $75k though the added cost of a HI loan may not be worth it. You'd have to get quotes to see, but you may be able to borrow at similar rates on an unsecured line or 401k loan. If you're planning to pay it off fast it's worth considering those shorter term options as well.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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