We have 5 kids and live in a 3 bedroom/2 bathroom house. That may seem a bit tight to you and let me tell you that most days, it is! Therefore, we’ve been talking about our options to add another room onto the house, along with tearing down our carport and adding a 2-car garage. The biggest determining factor here is should we apply for a HELOC or refinance the current home loan?
HELOC
A HELOC is a Home Equity Line of Credit. I had one of these about a year after I bought my house so that I could gut the kitchen and build a laundry room (since my washer and dryer were pulling double duty as counter space in my kitchen). At that time, it was very easy to get and I paid it off fairly quickly. This is a different payment that your mortgage monthly, so you can pay more than the monthly balance agreed upon initially to pay it off faster, just like your mortgage in most cases.
However, as the years have gone by it has become more difficult to get a HELOC. Not only that, but sometimes it is a much wiser financial decision to just refinance the house and use that money to do what renovations are needed instead. The reason here is because of the interest rates. The current interest rate for a HELOC from my current lender is anywhere from 3.615% – 6.615%. To me, that is a pretty wide range!
The caveat here is that it is usually much easier to apply and get approved for a HELOC than to refinance the house. But upon my initial search, it seems that the interest rates are what may be the killer here. Especially since they are variable after the 1st year.
Refinance
That leads me to taking a look at refinancing the current home loan for the amount we need to build the addition instead. I still have to get some more quotes, but the number is looking like it will be something around $80k or so. With that being the case, I want to be able to take out around $90k, in either scenario, for the build because inevitably something will not go according to plan and more money will be required.
The current rates that I have found for refinancing range from 3.878% – 4.553%. This isn’t as great as I had hoped, but our monthly payment would be less overall than if we decide to do a HELOC.
The biggest issue for me when it comes to refinancing the loan is the amount of paperwork and hoops that they make you jump through to even possibly qualify. I have always found this to not only be daunting but a fairly ridiculous practice for a homeowner that has paid their mortgage ON TIME every single month for almost 15 years now. Not only do I pay it on time, but I have paid more towards the principal many times. Therefore, I am not a high risk client. In fact, that should make me a dream client.
My current mortgage lender wasn’t even my choice, as they bought my loan out as soon as I signed the paperwork with the other lending firm. Which is hilarious to me because I applied for the home loan with them and they said I didn’t qualify due to my debt to income ratio, even though my credit score rates in the GOOD category.
When it comes down to it, I really don’t want to stay with them and am on the hunt for a new mortgage lender. My hope is that I will find one that has better interest rates and will actually look at my payment history and the fact that my income only increases every year. In fact, I just finished my taxes using TurboTax for last year and I made almost double what I did in 2015. So if that doesn’t say something, then I don’t know what does!
The Breakdown
The math here is this: If we borrow $90k in a HELOC, then we will add an additional $410 payment. Our mortgage with our escrow account currently is $567.42. So the two together add up to $977.42. Whereas, if we choose to refinance and add that $90k onto what we currently owe on the house, then we are looking at a monthly payment of $811.00 instead.
The interest rate on the HELOC is 5.25% and the interest rate on the Refinance is 4.553%. To me, this seems like a no brainer because not only are the monthly payments lower (although this is not adding in the escrow account) but the interest rate is almost .75% lower annually, which can really add up!
Now that the decision seems clear, it is time to dive in and start applying to see if we can’t get this thing done sooner rather than later. After all, our goal is for everyone to be healthy and happy, but not break the bank in the process. This is manageable for us and will increase the quality of life of everyone in our household, which can only benefit us all in the end.
Have you been considering a HELOC or Refinance for your current mortgage to do renovations? If so, what have you decided to do?
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