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To Refinance or Remodel: Why Not Both?

April 06, 2012 | Comments: 0 | Views: 106

You have lived in your home for a few years now and you want to take advantage of the equity you have built up. You have several options and you may feel a little confused. You have always wanted to remodel your kitchen or bathroom so do you go ahead and take out a loan and remodel now? Or do you go ahead and refinance first even though the remodeling will add to the overall value of your home? In the past you had to pick one or the other, however now there exists the possibility to do both.

Generally speaking when such a situation arises you have two main options. One is to obtain an equity loan based on your current home value. Two, you can get a general contractor to draw up some blue prints and apply for a construction loan. While they both have some similarities, they can cause some problems too.

One thing to remember is that both are considered second mortgages. That is, they are attached to your first loan, usually as a lien. The value for the equity loan is based on the current market value of your home. However, the construction loan can use the "finished value" of the house, meaning what it will be worth after construction is finished, to determine the loan amount.

The thing to remember is that many times a second mortgage will carry a higher interest rate then the primary loan. Additionally, an equity loan or credit line often has an adjustable interest rate rather than a fixed interest rate. It is low in the early life of the loan but goes up over time.

This can create a problem for some homeowners. What happens if your construction takes a long time and the low interest rates are no longer available? You are taking a gamble in hoping they stay the same while you remodel.

However thanks to the feds, things have changed quite a bit for home owners in the last few years. Now many lenders offer a refinancing plan that lets you refinance your primary loan while letting you borrow enough for home improvements. Freddie Mac and Fannie Mae both have programs that allow you to do this. Not every lender has these plans, so you may have to do some hunting to find the right one, but it's good to know there are options available if you need them.

Aiden Jefferson lives, works, breathes and writes in sunny, Southern California. He primarily writes about cars, home ownership and college life. He would love to write about dating and relationships but knows absolutely nothing about them. If you do wish to refinance, then a new home loan can really help.

Source: EzineArticles
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