Refinance or HEL or HELOC

[klarose]

I'll try to keep this as short as possible, and try to explain it so you can understand. I've posted something similar before but didn't really get any answers.

We need to come up with at least $30,000 for a home remodel within the next few years.

Our house HAS to be refinanced by August. I don't know the details of why exactly or what happens if I don't. I'd have to talk to my loaner, but as far as I was told when I got the mortgage was that we got a temporary short term loan than had to be refinanced during the allotted time. I may be able to delay it, but I'd have to look into what the penalties would be.

Our current loan is around $51,000 at 6% interest, 30 year. Our payment is $520 a month counting our taxes and insurance.

We are really hoping to get a 30 year at 3.5% but I know the market can be fickle so that's no guarantee.

Now the dilemma. How exactly should we get the money.

We weren't planning on doing the remodel for a couple years so we could save for it. But since we are refinancing we think it would be in our best interest to get a cash out for some of it.

We can only save about $2,500 a year.

We would need around $20,000 as soon as we started the remodel, and the other $10,000 could be spread over a couple years.

Our current idea is that we refinance for $60,000 next year. That would make our payment $450 if we got the 3.5% interest.

Put the $9,000 in a savings account, and continue saving for another year. Which would put us around $15,000.

At that point we could get a HELOC and try to finish the remodel in chunks paying it down as we go.

Originally we were going to get the entire amount at the refinance but I don't like the idea of paying such high payments for 30 years.

My reasoning with a HELOC is that even though it will be higher interest rate, we could put off the remodel and wouldn't have to start paying that for a couple years, and it would be a smaller separate loan that I could pay down a lot faster.

Thoughts, advice? We've been trying to think of the best possible attack for nearly 2 years now and I'm still not sure what is the best option.

[TBH]

What is the value of the house? Do you have enough equity to borrow the money for the remodel, either through a cash-out refi or through a HELOC?

I think your reasoning sounds good. It is a little tempting to recommend that you borrow the entire amount with a HELOC so you won't have to make those higher payments starting next August when you don't plan to use the cash for a while. But if you can lock in a low rate it might be worth it. Also, once you've saved for the remodel, paid for it with the HELOC, and paid off the HELOC, you could start paying down your first mortgage and not keep it for the whole 30-year term.

If you have the equity, it might actually be easier to get a mortgage for $60K. Before we sold our first house, we only had $45K left on the note. We looked into refinancing and keeping the house and some lenders were reluctant to touch us because the loan was so small. I'm not sure if that's normal or if that was just the weird mortgage market we found ourselves in in 2009.

[TBH]

PS. You sound like you've thought this through carefully, so I assume you've got your other ducks in a row--E fund, retirement, debt, etc. And you say this is a necessary remodel. I understand that. Sometimes you really have to do it.

[klarose]

The value of the house is at least $85,000 right now. I won't be sure until they appraise it again. But that is the number I was quoted 1.5 years ago. But we have put a LOT of work into it, so I'm fairly certain it's well over that.

We also had these remodels in mind, and mentioned them to the appraiser while he was here at that time. He said it would raise our home value by at least however much we put into it no question. He seemed very pleased with our remodel ideas.

Our bank also will also appraise and count the equity in our home as if he have already done the remodel when we refinance. They did this when we bought it as a fixer upper, we listed some of the things we planned on doing to it, and they went ahead and counted that in our appraisal and equity ratio. So I have no doubt we will be able to get the amount that we need.

That is what I keep going back and forth on. I HATE to pay interest and borrow money that I won't be using for a year or more. How do I decide if it's better to get it completely on a HELOC or get some at refinancing? The interest I'm guessing will about about 1.5% higher on a HELOC as of today's rates. So I'm not sure which would be better in the long run.

You are right, some are reluctant to do such small loans. I'm not sure why, so we may get a better rate going for the $60,000.

E-Fund is building now. Retirement will be taken care of first, and we have no other debt.

[LivingAlmostLarge]

Right now 30 year rates are trending at around 4%. How does that affect your calculations? Either way is the amount of interest even significant? I ask because at that small dollar value it may not matter.

[Petunia 100]

Sometimes the rate for a cash-out refi is higher than the rate for a straight refi. Your first step should be talking to your lender and finding out exactly what rate you can expect for a refi, a cash-out refi, and a Heloc.

If the rate for a cash-out refi is the same as the rate for a straight refi, I think that is the better option. Remember, you don't have to keep the debt for 30 years. The reason I think this is...the Heloc rate may increase substantially before you have the 30k paid in full. Personally, if I could lock in a low fixed rate, that is exactly what I would do.

However, if the rate for a cash-out refi is higher, the Heloc may become more appealing.

There is really no reason to wait until next August to do the refi, is there? You could do it now. Or, you could get the paperwork started, and just tell your lender "I want X rate, call me when I can get it".

[Petunia 100]

Our current idea is that we refinance for $60,000 next year. That would make our payment $450 if we got the 3.5% interest.

Put the $9,000 in a savings account, and continue saving for another year. Which would put us around $15,000.

Also, it looks as though you are estimating the closing costs to be $0. Does your lender offer a special program with $0 closing costs? They do exist, so that is possible. Otherwise though, you should expect to pay a bit more than that.

[klarose]

Sometimes the rate for a cash-out refi is higher than the rate for a straight refi. Your first step should be talking to your lender and finding out exactly what rate you can expect for a refi, a cash-out refi, and a Heloc.

If the rate for a cash-out refi is the same as the rate for a straight refi, I think that is the better option. Remember, you don't have to keep the debt for 30 years. The reason I think this is...the Heloc rate may increase substantially before you have the 30k paid in full. Personally, if I could lock in a low fixed rate, that is exactly what I would do.

However, if the rate for a cash-out refi is higher, the Heloc may become more appealing.

There is really no reason to wait until next August to do the refi, is there? You could do it now. Or, you could get the paperwork started, and just tell your lender "I want X rate, call me when I can get it".

Also, it looks as though you are estimating the closing costs to be $0. Does your lender offer a special program with $0 closing costs? They do exist, so that is possible. Otherwise though, you should expect to pay a bit more than that.

When I asked before the rates were the same if I got extra money back or not. While I like the idea of locking it in at a low rate, my payments would be quite a bit higher with the entire amount. Which is why I would feel more comfortable getting some in the refinance, and then the rest later with a HELOC when I actually needed it. So I'm not stuck with high payments for 30 years if I got in a pinch. Although I expect our income will only go up from here, it's nice to be safe.

Yes. We want to wait as long as we can. The reason we had to get the temporary loan in the first place was because husband had absolutely not one ounce of credit, good or bad. He has always paid cash for everything. So he did not qualify for the record low interest rates. They gave us this 2 years to hurry up and get him a score, so at least he "exists" in the system. We have done what we can, paying bills, got him a credit card, and got a few small personal loans that we just put the money in the account and had automatic withdraw to get him on the map.

The closing costs is also dependent with his credit score. Our last mortgage the closing costs were like $1,700 or close to that without any deductions. We are hoping to get them for a couple hundred dollars which we can add into the loan or pay out of pocket. But we will see how he scores next year.

While he won't have a great high score because it takes a lot longer than 2 years, at least he will have something and they will see that he always pays on time. We are hoping this is enough to get him in the low interest rates. The banker said this should be good enough but I'm anxious to find out. I'd really like to go and have them check our scores to see how he is doing, but I'm scared that tapping it would lower it a few points.

[LivingAlmostLarge]

Have you gotten more recent rate quotes? Wouldn't it make more sense to ask this question next year when you can see where rates are?

[TBH]

While he won't have a great high score because it takes a lot longer than 2 years, at least he will have something and they will see that he always pays on time. We are hoping this is enough to get him in the low interest rates. The banker said this should be good enough but I'm anxious to find out. I'd really like to go and have them check our scores to see how he is doing, but I'm scared that tapping it would lower it a few points.

You can check your credit score without lowering it.

There are two kinds of requests for information that get sent to the credit bureaus, usually called a "soft pull" vs. a "hard pull."

A soft pull is just you or someone else looking to see what your overall credit picture looks like. It does not ding the credit.

A hard pull is when you actually apply for credit with a mortgage company, credit card company, etc. That is when some entity makes a more formal inquiry, and you're right that a lot of hard pulls in a short period of time can lower your credit score a little.

You can get a free credit report, where you see exactly which accounts are listed under his SSN and what the payment status is on all those accounts. But that won't tell you the credit score. For that, you usually have to pay a little bit.

Here's a bit of reading on soft and hard credit pulls.