Mortgages pay for home renovations
Are you thinking about remodeling your home in Orange County? Certainly right now mortgage interest rates are low, so you can get financing at a very competitive rate to complete remodeling your home. You may be wondering, though, whether you should refinance now, or wait until the improvements have been completed. Alternatively, should you get a loan for the remodeling, complete it, and then refinance both loans? Actually, it may be possible for you to do both.
Home Equity Loans and Construction Loans
There have traditionally been two ways of using the equity in one's home to get financing for remodeling. One was to get a home equity loan, which would be based on the appraised value of the home. The other was to get a bid from a contractor, and apply for a construction loan.
Both of these loan types are second mortgages, which are subordinate to the first mortgage. Home equity loan is based on the home's market value as it is before the remodeling, and the construction loan is based on what the house will be valued at following the remodeling. While you are in the process of remodeling your home, it's not unusual for the cost of construction to be greater than the current property value, and with no equity in the home, lenders aren't always eager to offer best mortgage interest rates.
Combining the Two
Often, a second mortgage has an interest rate higher than the original mortgage. With a home equity loan, the mortgage interest rates are adjustable, meaning that it could be low now but high later. If you take a home equity loan or a construction loan, the rate could be higher than for a first mortgage finance. And if the construction is going to take a while, there's no guarantee that the rate will still be the same - you end up just hoping that the rates stay low until you're able to refinance.
Some lenders offer refinancing that allows you to refinance your first mortgage, and borrow for remodeling your home at the same time. Freddie Mac and Fannie Mae both have programs that permit this, under the current low, fixed rates for mortgages as opposed to the higher construction loan rates.
Just as an example, imagine that you want to make some improvements to your home, and your mortgage is $180,000. The appraised value of your house is $200,000. Clearly, you don't have a whole lot of potential for a home equity loan. Now, imagine that your home improvements are going to cost $100,000, and when the construction has been completed, your home appraises somewhere around $300,000. Under the new mortgage program, you'll be able to finance remodeling your home, based on the future appraised value, and you'll be able to refinance at the same time using low mortgage interest rates.
Keep in mind that not all lenders are going to offer you this program in Orange County, so it might be necessary for you to do a bit of comparison shopping. However, regular refinancing and construction loans don't have to be considered as totally separate any longer. There's no reason why you can't benefit from the best of both.