To decide between a cash-out refinance and a home equity line of credit, consider the cost of refinancing your house. The closing costs are usually several thousand dollars. And, it doesn’t make sense to finance a larger amount if the interest rate is higher. If your current mortgage is at a lower rate than currently available, it probably makes more sense to take out a home equity loan.
Once you have a schematic design and a preliminary construction estimate, then you can lock-in the loan amount and interest rate. The bank will pre-approve you for a loan and it is possible to purchase a rate-lock agreement valid through the expected completion of construction. You only pay interest on the construction loan as you make draws. You, the contractor and the lender establish a schedule for draws based on stages of construction. Construction loans are usually variable-rate loans priced at a spread to the prime rate or other short-term interest rates. The full amount of the construction loan is due on completion of construction. The property is refinanced on completion of construction. So, the borrower pays two rates—one for the construction loan and one for the mortgage. During construction, the bank will send an inspector out to check the project at every stage of construction. There are fees for these inspections—usually in the range of $50.00 per inspection, that are paid for by the borrower. The major advantage of this type of loan is that you only have to make one application and have one closing and you can borrow more than would be available to you with a conventional refinance.