HELOC or HEL Conversion to Conventional Loan

[GrillMasterTake2]

The rates for a HELOC or a Home Equity loan are one to two points higher than a typical conventional loan. If a home has no existing mortgage, is it possible to attain a HELOC or an Equity Loan for a home remodel, and once the project is complete, refinance the HELOC to a traditional conventional loan for the benefit of a better rate?  The point being there is NO existing 1st loan to refinance, only a HELOC or home equity loan. Thank you for your input!! It's much appreciated! 👍

[ShanetheMortgageMan]

Using a line of credit for a remodel and then switching to a traditional mortgage once the work is finished is very feasible and pretty common. Since there is no existing loan on the home, the line of credit or equity loan would be the only debt on the property.  Once the renovation is complete and the value of the home has potentially increased, you just refinance that balance into a standard conventional loan to lock in a lower fixed interest rate.  What is your timeframe to complete the remodel?

[GrillMasterTake2]

Thank you Shane, for your attention to my question. That does put me at ease a bit. From start to finish, my contractor tells me it will take him 4-6 weeks. So I'm interpreting this as 3 or 4 months. He's a very close friend of mine. 

[ShanetheMortgageMan]

That's pretty quick.  How much do you think the home improvements will end up costing, total?

[GrillMasterTake2]

The total I'm borrowing will be $150K. That will cover the remodel and a few small additional projects. It looks like HELOC's are running about 6.5% or so. Honestly, the "variable/adjustable" rates scare me some. I still feel emotional "aftershocks" from the crash of 2008.  We were fortunate enough to NOT lose our home, but we still got hurt.  

[kurikasqide]

Yeah, plenty of people do that — use the HELOC as the short-term build/remodel money, then roll it into a conventional mortgage later for the lower rate. Just make sure the post-reno value supports the refinance, that’s usually the big thing lenders look at.

[albertino399]

Yes you can absolutely do that. You would just apply for a regular conventional cash out refinance even though there is no existing first mortgage to refinance. The bank will treat it as a new first mortgage and use the cash to pay off the HELOC. The only catch is that you will pay closing costs twice, once for the HELOC and again for the cash out loan. So you need to run the numbers and make sure the interest savings actually beat the extra fees. If you are doing a big remodel and plan to keep the house for a while it usually makes sense. If it is a smaller project just keep the HELOC and pay it down fast.

[GreatLife]

Also to mention.. in the interim avoid any mortgage disqualifying changes to employment/income/credit/DTI, and make sure the increased home value is enough to prevent PMI.