A cash-out refinance is a replacement of your first mortgage, so this option does involve new closing costs. With this option, you refinance your mortgage for more than you currently owe and then pocket the difference. Let’s say your home is worth $750,000 and you current mortgage is $300,000. You want to remodel your kitchen and you also need some cash for your child’s tuition, so you’ve decided you need $100,000 for both. With cash-out refinancing you would refinance your mortgage for $400,000, taking the additional $100,000 out in cash and hopefully borrow the money at a lower interest rate than your original loan. With the newest tax laws for 2018, you can only deduct $750,000 of mortgage interest, so this refinance loan amount would be added to a home mortgage if you have one.
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.
A loan to future value involves making projections about the future worth of a property after improvements and adjusting the financing arrangement accordingly. The construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The lender will evaluate the impact of property improvements on the value of the land and buildings involved. The extension of the mortgage will be based on whether the lender determines that the amount of the loan will result in a rise in value of the property that is at least comparable to the amount of the loan, including interest and fees. With the newest tax laws for 2018, you can only deduct $750,000 of mortgage interest, so this loan amount would be added to a home mortgage if you have one.
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.