Home-equity has reappeared for many Sonoma County homeowners, making home improvement projects a reality. Redoing the kitchen, adding on a bathroom, how about replacing the roof? All of these and can be a pricey investment. Here are three ways to cut the mustard…
Top 3 Loan Solutions
Home-equity line of credit a.k.a. HELOC– the program creates a lien on the property similar to a gigantic credit card, but secured by your home unlike a credit card which is unsecured. You as homeowner have the ability to borrow on a certain percentage of the line amount and have to pay that back based on an interest only monthly payment within the first ten years. So from an accounting perspective, the program is attractive because the mortgage payment is quite low. The equity line is tied to the primary rate plus a margin (margin being mortgage lender’s profit), index + margin = ‘real interest rate’. The margin can be anywhere from .5% to 1% or higher dependent on your credit score. Usually, heloc’s are offered a prime +.5 for example, totaling a low 3.75% rate.
- cheap as long as interest rates remain favorable
- takes 30 days or less
- goes up to 80% loan to value or combined loan-to-value with first mortgage
- payment is based on interest-only so if you make a larger payment towards principal that will be reflected in the following month’s payment i.e. will be lower
- is an adjustable rate mortgage that moves in sync with Prime and Fed
- payment is interest-only, principal balance only reduces when over payment is made
- If the first mortgage is going to be refinanced, the second lien holder holding the equity line will have to agree to subordinate to a new first mortgage, essentially have to agree to remain in second position on the property
Cashing Out Refinance Mortgage- option essentially involves casing out a first mortgage to payoff the current mortgage and any subsequent second mortgages in addition to borrowing enough funds to cover the cost of the remodeling. To do complete a cash out refinance, most lenders require a loan to value of 75% and a high credit score in the neighborhood of 700 or better.
- longer term solution as the payment is fixed rate compared to a heloc
- takes 30 days or less to obtain
- goes up to 75% loan to value of the home
- timely repayment of principal and interest results in monthly principal balance reduction
- Interest rate could be higher than current first mortgage rate
- may need to finance more than the cost of the project, thus paying interest on money not needed
- may not be able to get as much cash out due to 75% maximum loan to value
Personal Loan/ Bank or Online-This choice can be obtained from a local bank or even from an online lender. Rates are anywhere from 11-12% with excellent credit to low 6-7% rates working with a peer-to-peer online lender. These loans typically have shorter terms and are unsecured, thus higher rates offered. The shorter the term the higher the payment making a personal loan pricier.
- No loan-to-value is required, so if there is an equity obstacle
- Can be paid off sooner than traditional financing
- Faster access to securing funds
- No tax advantages
- Substantially higher rates compared to refinancing a first mortgage or obtaining a home equity line of credit
- Higher payments on these loan types must be counted into debt to income ratios on future financial transactions limiting ability to qualify
Because home improvement project costs especially larger scale endeavors such as, ad addition of a bedroom or remodeling of the bathroom for example tend to vary, it’s always ideal to try to get more funds than necessary to account for variances. With all of the three financing types laid out, if the additional funds are not needed, they can be reinvested back into the principle balance of the debt, however of the three choices the only one that would favorably affect the payment would be the home equity line of credit. The other two options are based on principal and interest amortizing loans wherein the payment would remain constant despite the principle balance reduction.
If you are looking for the best way to finance your remodeling project, start with us today by getting a complementary mortgage rate quote, it’s free.