Need More Space During COVID-19?
At the end of the day, your sanity and peace of mind is priceless
If you are like millions of Americans, you might be going a little stir crazy with the current resurgence of COVID-19. You survived the first six months of this crisis, but at this point, it might feel like the walls are literally closing in, especially if you are living in a home that suddenly seems too small for your needs.
Do you need more space for a home office? Are your kids learning online at home again and there is not enough breathing room? Regardless of how much you love your spouse, being together 24/7 could be straining your relationship and you need a second bedroom. These are all very valid reasons to renovate your existing residence.
The good news is there has never been a better time in history to get the money to make some home improvements. The Federal Reserve has continued to keep short-term interest rates low, making it more attractive to borrow money.
Here are the best options of how to borrow money using your home as collateral:
Refinance Existing Mortgage-Cash Out Refinance
Odds are you have more equity in your home today than a year ago, thanks to booming real estate prices caused by a lack of inventory and increasing demand by homeowners looking to move to Colorado during the pandemic. That appreciation can be used to refinance your existing mortgage, particularly it if is higher than your current mortgage rate.
If for example, if your current mortgage is at 4% or higher you can possibly refinance at 2.75 %-3.25 % depending on the amount you want to take out, value of your home and credit score.
With a cash-out refinance, you borrow more than you owe on your current mortgage today and use the difference to finance improvements or other purchases.
The amount you can borrow depends on the equity you have in your home, but banks will typically allow you to borrow up to 80% of your equity.
Keep in mind that you will also face closing costs – which can be 1% to 2% of the loan amount. Only do this loan if you know you are going to be in your house another 5 years because the closing costs are high.
Home Equity Loan
Using a home equity loan is another good way to get the funds to do a remodel. There are pros and cons to doing this. The pros are you can get a fixed rate like a regular mortgage and you will receive a lump sum up front.
The monthly payments will also not change. The cons are, you will now have two payments, a mortgage payment and a second home equity loan payment, and potentially run the risk of using all the equity in your home, so if real estate prices ever drop you could owe more money on your home than it is worth. Current rates start at 5%. You can borrow money anywhere from five to thirty years which is like a mortgage.
HELOC (Home Equity Line of Credit)
HELOCs serve as a line of credit. They have adjustable interest rates so your payments could go up if interest rates rise and you draw money as you need it. The good news is you only pay interest on the amount you use and there is no pre-payment penalty when you pay it all off. You can also just pay the interest on the amount you use and not pay back any principal with every payment like a mortgage.
The rates on HELOCs today start 3.5% to 4% but can go up from there because they are adjustable. You have up to 10 years to use the HELOC money and 20 years to repay.
One of these three options can be used to get the extra cash to remodel your existing home. Obviously, a cash out refi is the cheapest because you can get the lowest interest rate. The next most affordable would be the HELOC because the floor or initial rate is lower.
A Home Equity Loan is the most expensive because it is a second mortgage on your home. There is no free lunch, all three options will have fees in the form of closing costs and appraisals on your home which cost money.
At the end of the day your sanity and peace of mind is priceless. There are several good reasons to do this sooner rather than later.
First, money has never been cheaper, and if we get a vaccine in 2021 and the economy recovers, interest rates may rise.
Second, home prices have appreciated considerably in the past year, so now is a good time to take advantage of the increased equity to borrow against.
Finally, adding square footage in the form of a home office or extra bedroom would be a good investment in this market because Colorado continues to be a very desirable place to live during this pandemic and these changes could make your home more enticing to future buyers.
Fred Taylor co-founded Northstar Investment Advisors, LLC in 1995. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.