Financing a major home renovation
By Bankrate.com
Q.
My
husband and I are planning to build an addition on our home. Which
would you recommend, a home equity loan or a construction loan,
and why?
Ideally, you would combine the construction
loan with your existing mortgage into a new first mortgage. You'd
only look at a second mortgage (home equity loan) if the appraisal
weren't high enough to justify the new, larger first mortgage.
The real key to successfully financing the addition
is in how the addition increases the appraised value of your home.
Paybackestimator
provides both regional and national averages for different remodeling
projects.
Let's just say for discussion purposes that you'll
realize 80 cents on the dollar for your addition in a best-case
scenario and 60 cents on the dollar in a worst-case scenario.
| |
|
|
| Current appraised value |
$365,000
|
$365,000
|
| Loan balance |
$280,000
|
$280,000
|
| Construction loan |
$200,000
|
$200,000
|
| Payback percentage |
80%
|
60%
|
| Post construction appraisal |
$525,000
|
$485,000
|
| Total loans |
$480,000
|
$480,000
|
| Loan-to-value |
91%
|
99%
|
The higher the loan-to-value, the harder it will be
to roll the construction loan into a new first mortgage. That's
when you would want to consider a home equity loan vs. refinancing.
|
