topic Re: Refi for home improvement? in Mortgage Loans

Refi for home improvement?

aparker2005 — Mon, 18 Nov 2024 12:41:35 GMT

Hey everyone. Trying to figure out the best way to go about a major bathroom remodel, and our mortgage lender offered us this. I'm considering it vs going with a credit union, maybe.

Currently owe 48k on our home. 5 in 1 ARM when we bought our house. Went from a 3.1 to currently 5.5 rate. $548 monthly mortgage. We have had a shower leak that we were unaware of that has caused some damage in our main bathroom. Tile shower. We've had a few problems with it, so we're to the point of wanting to rip it out and have a new one installed. This will include floor/wall repair. Since we're doing this, wife also wants to get a new vanity and bathroom mirror as well.

Our Lender only allows a 45k minimum cash offer. We obviously don't need nearly that much. They told us what they can offer is for us to take the 45k out, refinance at a 6.7% (I believe it was 6.7, could be a decimal point or 2 lower) fixed rate, and refinance at a projected lower rate within 18 months, free. The current refi charges would be rolled into the new loan. This would allow us to pay 1 of our 2 cars off, and my wife get the bathroom remodel she wants.

Mortgage would go up roughly $301 monthly, but we would also be saving around $310 monthly without the car payment, and if rates continue to fall, would have us saving a little more. Does this make sense to do? We have a little in personal savings, but I'd rather not take a ton out of that since it's been hard to get it back to where we have it currently.

I'm pretty sure I asked the following 2 questions while I was on the phone but was overwhelmed at the time:

1. When we refi, are we refinancing the original house amount, or only the 48k we owe?

2. If we refi and take out say the 45k minimum, what happens to the 48k we owe, or is that what is refinanced? That seems like a stupid question but just making sure I have our ducks in a row before making any decisions. Thanks!

Re: Refi for home improvement?

aparker2005 — Mon, 18 Nov 2024 13:54:36 GMT

I guess I should add that if it matters, my and my wife's credit scores are in the 800s

Re: Refi for home improvement?

aparker2005 — Mon, 18 Nov 2024 15:26:17 GMT

My other thought is, just pay it out of our savings, and put tax return and bonus money from work back into our savings account once it's done.

Kinda not liking the idea of a higher rate, and starting a 30 year, higher amount loan over after paying already the last 10 years. Almost seems stupid to do that?

Re: Refi for home improvement?

aparker2005 — Mon, 18 Nov 2024 16:22:54 GMT

Lender also offered a 20 year fixed and still save $200 or so monthly. That would eliminate the losing 10 years of payments

Re: Refi for home improvement?

sccredit — Mon, 18 Nov 2024 17:18:04 GMT

IMO I would look at a HELOC for the remodel and if interest rates are materially lower in 18 months you can refi into a 15 or 20 year fixed then.

Re: Refi for home improvement?

ShanetheMortgageMan — Mon, 18 Nov 2024 17:31:34 GMT

If you refinance your existing mortgage then the new loan amount will be your current loan amount + closing costs + however much cash you want to get out.

Even though their initial offer was a 30-year loan you can still make larger payments to pay it off in a shorter period of time.

Financing unsecured debt (car) into secured debt (mortgage) isn't usually advisable since if you can't make the payment it won't be your car that's repo'd, it'd be your home that is foreclosed on. The savings is also because you are stretching that short term car loan into a longer term mortgage. You'd need to compare the interest rate on the car loan vs. the interest rate on the new proposed mortgage, if the mortgage rate is higher then there is no benefit other than payment relief.

If your current ARM is in it's adjustment period (sounds like it is) then you might have another rate increase coming at the next annual adjustment. The rate it'll adjust to is based on an Index + the margin on your particular loan (your closing paperwork will spell that out, or you can just call your mortgage company and ask).

How much do you actually need to complete the bathroom remodel? How much is owed on the car loan and what is the interest rate?

As @sccredit point out, another idea is to get a Home Equity Line of Credit (HELOC) and just borrow on it as you need to. You can get a HELOC with a high limit and only use a small portion of it. That way you'd keep your existing mortgage in place.

Re: Refi for home improvement?

aparker2005 — Mon, 18 Nov 2024 17:44:49 GMT

Owe 35k on the vehicle we would pay off. Interest rate was at 8% because I didn't put any down. Got that rate even with a 820 score.

Getting estimates this week on bathroom repairs. I was expecting them to be high being a new shower, and flooring/walls needing to be repaired (10-12k I was guessing). That may be really high for what we need done.

Current mortgage rate is 5.1%, owe $47, 258.

So it would be a 20 year fixed at 6.5% with 45k cash plus the $47,258. Payments would go up to $964/month, still saving $200 monthly between the vehicle and home. Refi at a lower rate within 18 months.

If we wanted to do a HELOC, do we just apply for that loan at our credit union for example, and it's just another loan we're paying on? Ideally I don't want to start another loan monthly, hence maybe just paying it out of our savings and putting it back depending on the estimates, and not worry with any of this.

Re: Refi for home improvement?

ShanetheMortgageMan — Mon, 18 Nov 2024 18:01:41 GMT

If you can afford to use your own savings then that'll be the smartest financial move, as then you won't have to pay any closing costs nor interest. Guess it just depends on how quickly you need to fix the bathroom issue.

The rate on the car loan is higher than the proposed mortgage interest rate, but again to get it you'd have to pay closing costs on the loan (even if they are added to your new loan amount, you are still charged them). Are the closing costs more than the interest you'd save? If so, then that wouldn't make sense to do. It can be tricky to calculate that since the remaining loan term on your car and the mortgage's loan aren't the same.

A HELOC would be a 2nd mortgage for you, so you'd have your current mortgage payment + a new payment when you decide to borrow funds on the HELOC. Sometimes HELOC's have no closing costs, that'll just depend on who you obtain the HELOC from. Your own credit union probably offers them, or if they don't then they can probably recommend a local bank that does. There have been a lot of threads here discussing HELOC options too, so definitely do some research.

Re: Refi for home improvement?

aparker2005 — Mon, 18 Nov 2024 21:21:38 GMT

First estimate on the shower remodel is roughly 5k. If that's all it's gonna be, I'm thinking of just paying it ourselves and using tax refund/bonus in Jan or Feb to put that money back.

Id love to have 1 car paid off, but I'm not thinking the reward is all that worth it now

Re: Refi for home improvement?

aparker2005 — Tue, 19 Nov 2024 02:54:20 GMT

Thanks for the comments. We're gonna skip doing a refi and pay this with our own cash!

Re: Refi for home improvement?

ShanetheMortgageMan — Tue, 19 Nov 2024 17:19:04 GMT

Smart decision! Yeah for a $5k home improvement project you'd be better off just saving up funds to handle it yourself, or worst case get a personal loan for it. Significantly cheaper than taking cash out through any type of mortgage product.

Re: Refi for home improvement?

aparker2005 — Tue, 19 Nov 2024 17:23:50 GMT

Well another update. We found and were referred by friends from a company that just did their bathroom.

They are likely going to be significantly more expensive, but they also handle every aspect of the renovation. Flooring, plumbing, shower, glass, paint, everything. They have a warranty and guarantee on their work, and also install in 2 days max.

I'm thinking closer to 12-15k for this project, but we're getting an estimate to see. We MAY consider the refi option for this, or check to see what their credit card/financing options are and still pay it ourselves.

I know it's more expensive, but I like that these people handle everything themselves instead of us having to have 2 or 3 people involved, waiting on schedules to line together, and having a guarantee/warranty.

Still gonna weigh options with a refi being the last resort option for us. Thanks again!

Re: Refi for home improvement?

aparker2005 — Thu, 21 Nov 2024 15:43:51 GMT

One last update that I'm actually wondering if it's a benefit. You smart people can definitely give some advice.

Bathroom remodel, we financed. $15,800 at 9.9% APR, $192 a month. We plan to pay more monthly and pay this off soon. We will have the cash to do that before the term of 11 years is up.

Vehicle - $619 monthly, 8.7% interest rate. 60 months.

So roughly $820 monthly for these 2.

Our mortgage lender is offering a 51k loan at 6.7% locked rate, 20 year term to pay this shower and car off together, much lower monthly payment and lower interest rate. We also do not have to refi our home whatsoever, we'd basically be using the equity in our home at a lower rate to pay these 2 higher rate bills off.

Should we do this, we'd obviously pay more than the minimum monthly and have it paid off quicker than the 20 year term.

Is there any benefit to this? I've never really considered all these moving loans and terms, but the cheaper interest rate makes me think it's a better deal if we pay more monthly.

The 20 year term part makes me think we'd just basically be breaking even though?

Wed be saving around 250-300 monthly if we did the loan combination.

Re: Refi for home improvement?

pizzadude — Thu, 21 Nov 2024 16:37:13 GMT

Your payments would be lower but you'll need to run the numbers to see if you'll be paying more interest with the 20 yr option.

Start with your car loan, how much interest is remaining to be paid on this, also look at the 9.9% remodel loan - how much interest would you be paying on this before you have it fully paid ?

Compare the numbers above with the interest you'd be paying on the 6.7% / 20 yr loan, if you pay off sooner than 20 yrs use that number for the interest you'd be paying.

Re: Refi for home improvement?

aparker2005 — Thu, 21 Nov 2024 18:58:25 GMT

After reviewing that, we'd be saving close to $400 monthly. That sounds wonderful until I saw how much total interest we'd be paying. I would love to have my car paid off, but it's not really paid off since I'm just rolling it into a slightly lower % interest loan, but at a much longer term.

Ideally, if we ever take out a HELOC type loan for these amounts, it will be for a kitchen remodel.

After thinking and researching, I just don't think moving a shower and car loan into a heloc is the best idea. We can manage and pay these off in the terms we already have, so I don't see the long term benefit of doing this.

Thanks again everyone

Re: Refi for home improvement?

pizzadude — Thu, 21 Nov 2024 19:29:35 GMT

That's probably the best option. Crunching the numbers on the 20 yr loan, you'd be paying over $41K in interest over the 20 year period.

Re: Refi for home improvement?

aparker2005 — Thu, 21 Nov 2024 23:07:44 GMT

So looks like we may do this after all. We owe 36k on my car, and 15k on the bathroom renovation.

Car at 8.7%, for 6.5 more years, bathroom at 9.9% for 11.

Home equity loan for 51k, not touching our mortgage, at 6.7% locked for 20 years.

619 on the car, 193 on the shower. 812 monthly, we will be paying $820 to start on the combined loan.

Continue to pay the new loan which comes to 406 monthly minimum, with the 820, like we're paying the car and shower off normally, and we'll have this paid in 6.5 years at most, even earlier with other payments we will be adding.

That saves on interest at a cheaper rate and basically paying both of these off in the 6.5 years, or earlier, seems to make sense?

Re: Refi for home improvement?

pizzadude — Thu, 21 Nov 2024 23:56:56 GMT

Looks like in the first six years you'll have paid around $19K in interest.