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Financing an addition to our home

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?
Maureen Mortgage

Dear Maureen,
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.

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Bankrate's Mortgage 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 making process.

-- Posted: April 15, 2004

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See Also
Home equity vs. second mortgage
HELOC vs. a home equity loan
Financial advice glossary
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