With interest rates being so high, I'm kind of stuck in my primary residence, unless I REALLY want to stretch things to only get into a slightly bigger home. So, I am considering adding a 2nd level to my 1 story home. I know it can be done. Costs would be $300K - $400K depending on how big, how nice, etc. I would be aiming to keep the costs toward the lower end. Currently, I have my primary home loan, then a HELOC that has over $200K capacity ($50K balance remaining on it, but should be paid down in the next 3-4 months), so $155K or so available to draw on my HELOC at about 12%.
I have the capacity to take on an additional $200K in debt on top of utilizing my HELOC, so long as when I am paying it down the monthly charges also go down. I can't do a new 30-year and lock myself into triple the payment.
What options do I have to get a construction/remodel loan? Any idea on what interest rates would be on that? Please let me know if there is anything I am not aware of that would make sense.
Thank you so much for any input you can provide here!
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2y
How much is your current mortgage at what rate? It seems hard to believe blending it with a $200k 12% loan makes more sense than buy somewhere else. Imagine you owe $400k at 3% and borrow this $200k at 12%, that's the same as borrowing $600k at 6%. That seems like a much better deal than "flushing" $100k plus of your $300k-$400k expansion money there's almost no chance you get back. This of course can be disregarded if it's an $800k-$1.2m 3% loan but I still think in you're flushing a lot of the pop-top expansion. Could an ADU work for you?
Unless you love your home / neighborhood and there’s nothing else available this is your chance to buy a home that fixes what you don’t like about the current home.
Ps. There are buyers who are only looking at single story homes and they tend to be older people with money. You can target the, while buying a much cheaper ($ per sf) 2+ story.
How much is your current mortgage at what rate? It seems hard to believe blending it with a $200m 12% loan makes more sense than buy somewhere else. Imagine you owe $400k at 3% and borrow this $200k at 12%, that’s the same as borrowing $600k at 6%. That seems like a much better deal than “flushing” $100k plus of your $300k-$400k expansion money there’s almost no chance you get back.
Unless you love your home / neighborhood and there’s nothing else available this is your chance to buy a home that fixes what you don’t like about the current home.
Ps. There are buyers who are only looking at single story homes and they tend to be older people with money. You can target the, while buying a much cheaper ($ per sf) story.
Thanks Bill - great question. Home is worth a little above $1 million. I owe about $600K on it at 3.25%. We do like the area, like our neighbors, just have the much smaller model home on the street. Other than limited space, we love the home. If I get a new home at 6-7%, to get to the same size of a home, same age, same size yard, everything, that is a $1.3-$1.4M home, which is incredibly expensive. If I were able to obtain another loan for $200K, even at the same interest, I can pay that down and off over a few years, and then I'm back to my low interest loan only and a ton of equity in the home I could potentially tap into as well.
Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
2y
Find a local lender (probably a credit union as they love these) that offers 2nd mortgages - sometimes called Jr mortgages, HE-loans, or closed-end seconds. You may have to bridge into this with a construction loan, but typically you can go to 85% or 90% of the value of your home with the combined LTV. Rates on the second should be around 8.5-9.5%, and the amortization will likely be 15-30 years.
This is probably a better pathway for you since it seems you have the earning capacity to pay it down quickly. Even if the blended rate is higher than a cashout refi in the beginning, you can pay down the principal on the 2nd with your excess income while keeping the 1st mortgage in place as is. You'll reduce the effective blended rate with every extra dollar you pay down on the 2nd. This gives you some optionality and management over the process. If rates fall, you can refinance the 2nd without touching the 1st lien.
I wouldn't plan for long-term financing with the Heloc as the draw period will term out at some point. Use the heloc to fund the construction, and then roll it over into a 2nd after completion. Partner with your lender ahead of time on this just in case they have some crazy seasoning or other requirements. Just make sure you can survive if the expected rate on the 2nd is 200-300 bps higher than at present when the time comes. In my opinion, there's as much probability that rates continue to climb as there is that they drop.