||Ask Dr. Don
Financing an addition to our
Dear Dr. Don,
My husband and I are thinking of adding an addition
to our home to house our daughter, son-in-law and grandson. It will
double the size of our house, and will cost approximately $70,000
to $100,000. My husband is a carpenter and plans to do most of the
work himself. We are in our 50s. We have no mortgage, and our house
is valued at about $300,000. We have owned it for 31 years. Should
we take out another mortgage, a home equity loan or a line of credit?
In large part it depends on how long you plan to take to pay off
the loan and your attitude toward interest rate risk. With a first
mortgage, you can choose between an adjustable-rate mortgage, fixed-rate
mortgage or a hybrid that has a fixed rate for a number of years
and then adjusts. With a second mortgage, you can choose between
a home equity loan with a fixed interest rate or a home equity line
of credit where the interest rate will fluctuate over time.
Adviser can help you decide whether an adjustable-rate mortgage
or a fixed-rate mortgage is right for you.
With the amount of financing required for the addition, it's likely
to take you some time to pay off this note. That would have me considering
either a fixed-rate mortgage or a 7/1 or 10/1 ARM. Interest rates
are poised to head higher. Locking in a rate at or near record lows
is smart if it's going to take a while to pay off the mortgage.
Typically, closing costs on a home equity loan or
line are substantially lower than those on a first mortgage. Since
there's not an outstanding first mortgage on the home, there might
not be a big difference in the closing costs between the two different
types of loans. Talk to your lender about this as part of your decision
-- Posted: April 15, 2004