"Before" picture

"Before" picture

Tuesday, April 6, 2010

As the head spins

I talked to our mortgage refi agent today, and my head is swimming with numbers. Turns out that, while it may be cheaper in the long run to refi, it may be less stressful to just get a home equity loan.

What we preferred was a 20-year fixed-rate mortgage with $X cash out to do the remodeling work. Turns out that the credit union uses Fannie Mae for mortgage refis that are longer than 15-year terms, and the closing costs would be $5-$7K as opposed to $1K with a 10- or 15-year mortgage that the credit union handles in-house. Obviously, higher closing costs, while they can be rolled into the loan, result in less $ we can put toward the remodeling work. We have decent equity in our house but can't crack the 80% loan-to-value (LTV) barrier because the interest rates worsen at that magical mark. No point in refi'ing to a higher rate, right?

While I would really love to pay off our mortgage before I turn 50, accelerating our payoff from our current 24-years-left mortgage to a 20-year mortgage was going to be considerably less painful than the option of condensing all of this moola into a 15-year mortgage. And, as we expected, they insist on us having an escrow account (taxes only; not homeowners' insurance) until the LTV drops below 70%. Depending on how much cash out we would take from the refi and how much our house is worth according to them, that would take 1-3 years.

Lucky for us we have a great neighbor who is a real-estate agent, so she pulled comps for us, and we might have underestimated our home's worth on our initial refi application. Turns out Ken's massive garage might actually be considered an improvement on our property after all, and we do have a cozy fireplace and wet bar. The downside is we have one pitiful bathroom, but that's partly what this project is meant to correct as there is no way I'm going to raise two boys through their teenaged years in a house with one bathroom shared by all four of us. I shudder at the very thought.

We'll have to crunch the numbers tonight and see what we rises to the top as the best option. Although the interest rates on their home equity loans are roughly 2% higher than the mortgage rates, we would have an 85% loan-to-value cap (a bit more breathing room before the rates would crap out), and we wouldn't have to worry about adding an escrow account to the mix like we would with their refi program. I like the financial fluidity of managing our own tax payments.

I had hoped the financing decision would be pretty straightforward, but I'm the one who muddied the waters in the first place by suggesting we refi, rather than take a loan. Time to put that option back on the table and parse it out. Likewise, we could consider a home equity line of credit, though I need to know more about those before I'd jump in.

The good news is that we are one step closer and so much more educated about financing options. Padraic asks me every day whether we're going to make our house bigger yet, but he's got a little more waiting to do. I think I'll keep him busy by putting him to work on packing up the living room. The bookcase has his name all over it, and he already loves boxes.

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