Finance options for home addition

[Freedom2016]

My DH and I live in a 1500sqft home with our two kids, in a HCOL area. While the home works for us for now, we are contemplating an eventual reno/addition to the home in order to make it one that will work for us for many decades to come. What we would want to do is far beyond our DIY skills (which are few-to-none), and would require $$$ beyond what our cash savings would support. (We could probably cover half of the expense with cash.)

I realize that for some mmm'ers this is already a facepunch-worthy post. That's fine, I get it. Per mmm principles we've thought long and hard about our priorities and how to use our hard earned $$$. This is a high priority and we may be willing to sacrifice other things (i.e. earlier FIRE) to get it.

Having said that, we are in the information gathering stage so that we can really think through the options and their feasibility - perhaps we'll change our mind after we've examined all the possibilities. Here's where I could use some mmm help:

Currently our home is worth $600k and we owe $420k on a 3.75% 30-yr fixed mortgage. We have $875k in cash and investments.

For purposes of this post, let's assume we would need to borrow $200-250k for the reno, funding the rest of an estimated $400-450k addition ourselves.*

I am trying to understand what financial options we have available for the amount we would need to borrow:

(1) Get a construction-to-permanent loan. This one has been the easiest to research so far; we would refi our existing mortgage and wind up with a single mortgage at the end. How much we could borrow would be calculated off of the future value of the house. I don't really like this option because we would lose the 3.75 interest rate we currently have, I'm guessing we would wind up at 5% or higher.

(2) Cobble together a bunch of different loans: get a HELOC; borrow from one or more retirement accounts. Obvious down side that borrowing from retirement accounts seems like a bad idea, and I'm not sure if/how this would get us to $200-225k.

(3) Home improvement loan. This is the one that I'm not totally sure exists? I think my ideal thing is to get a 2nd mortgage based on the future value of the home, leaving our existing mortgage intact. But either I'm not looking in the right places, or these kinds of loans are rare/unusual? When I google "2nd mortgage" HELOCs come up. But I would only be able to access ~$60k through a HELOC because it's based on current home value.

(4) Home equity products. I'm not sure this is the right name for them but there seems to be a new loan product on the market that gives the lender an ownership stake in the home that they realize upon a future sale of the home. Here's one example: https://www.unison.com/home-improvement-uho/?utm_source=google&utm_medium=search&utm_campaign=UHO-Massachusetts&utm_content=Home-Improvement&gclid=EAIaIQobChMI9anR_5-Q3gIVgeDICh3EIA1fEAAYBCAAEgJB9PD_BwE I'm very much side eyeing this product; anybody know more than I do? Is it always and obviously a bad deal (like whole life insurance) or does it depend on the particulars?

Right now I think #3 would be our best option if it actually exists. Is option 4 even worth looking at? And, are there any options I haven't considered yet?


--
** We live in a town of $1-2million homes that are 3-4 times the size of ours; one of the largest estates in town is two doors down from us. So overbuilding isn't a concern.

[ixtap]

I would suggest that you would get more sympathetic responses on bogleheads.org.

It isn't just the money, more space uses more resources, as well.

[Freedom2016]

I would suggest that you would get more sympathetic responses on bogleheads.org.

It isn't just the money, more space uses more resources, as well.

That's fair. :)

[MommyCake]

600k current value plus 400-450 renovation = million dollar home.  Couldn't you just buy a different house that suits your family better?  That seems much simpler. 

Also, if you get a 700 or 800k larger home that just needs minor updates you could save money as well as the headache.  As well as the dust/constant cleaning and lack of privacy that comes with people working in your home for a months long reno. 

Just a thought.  But for financing, I would call the bank the holds the mortgage and ask about options. 

[Freedom2016]

600k current value plus 400-450 renovation = million dollar home.  Couldn't you just buy a different house that suits your family better?  That seems much simpler. 

Also, if you get a 700 or 800k larger home that just needs minor updates you could save money as well as the headache.  As well as the dust/constant cleaning and lack of privacy that comes with people working in your home for a months long reno. 

Just a thought.  But for financing, I would call the bank the holds the mortgage and ask about options.

Yes, definitely, it's an option to buy a different house. We have a few reasons why a reno appeals to us more than a move, but in the end we may conclude that's the better idea.

[affordablehousing]

Following as we're contemplating something similar. How firm do you have your construction numbers? We were thinking a vertical addition would run about $600 a square foot. While the reasons to do this are family oriented, we are also trying to think of this as an investment, i.e. can we add to the home value by doing one of these. I think our strategy will be to wait for this recession to deepen and contractors to get cheaper. Also, we're thinking of trying to get someone to do just the superstructure (foundation replacement, framing reinforcement, new framing, roof and stairway and stucco, and we'll do the flooring, drywall, electrical and plumbing and finish work to save some money.

WE couldn't figure out how to make it work as an investment without cutting labor costs. For borrowing, we'll just save up the money and probably get a 0% interest loan from an employer for these things. If you can be your own GC, perhaps you can finance it with 0% interest credit cards? How long would it take you to save up outright for it?

[Freedom2016]

No firm numbers at all, so this early research is quite speculative. I feel like there's a bit of a chicken-and-egg problem: do I spend $$ on an architect to get to the construction drawing phase so as to get bids, only to learn that what we want is so far out of our budget that we can't do it? Yet if we don't get more specific on what we want, we can't get accurate numbers on what it will cost. So the above is my best guess at what it would cost / what we would be comfortable spending.

I'm self employed so don't have access to employer loans (great option for you!). Depending on what kind of job DH eventually lands (he's applying for jobs now, after 5 years as a stay-at-home parent), we could save up the whole amount in 3 or 4 years.

BUT some big part of me would want to do the reno sooner than that so as to enjoy it longer with kids at home. We'll be empty nesters in 14 short years, so even two extra years of reno enjoyment would be meaningful for us.

[AMandM]

I got an ad in the mail from unisom just today and thought of you!
In the example the ad showed, they give you cash equal to 10% of the current appraised value of your house, but when you sell, they get back their stake plus 40% of the increase in value. If you're planning to hold on to your house for a long time once you renovate, that could be a lot of money lost at the time of sale in exchange for a relatively small amount of cash now. And 10 of your current value wouldn't be anywhere near enough to fund your renovation anyway.
On the plus side, according to the fine print, you can apply to exclude the increase in value that comes from your renovation.

[Goldielocks]

We got a HELOC from a different bank than our 1st mortgage, and they had a different valuation, so that we were able to borrow up to $150k, even though the first mortgage tied up 75% of the home purchase price value.   I think the second company valued it based on the size of the property, instead of current value, as we were rebuilding a home with a major reno.

They also very much wanted our business, and the HELOC we signed said that they went to 1st position when the other mortgage came due / expired (we have 5 yr mortgages here).

[clifp]

Currently our home is worth $600k and we owe $420k on a 3.75% 30-yr fixed mortgage. We have $875k in cash and investments.

For purposes of this post, let's assume we would need to borrow $200-250k for the reno, funding the rest of an estimated $400-450k addition ourselves.*

I am trying to understand what financial options we have available for the amount we would need to borrow:

(1) Get a construction-to-permanent loan. This one has been the easiest to research so far; we would refi our existing mortgage and wind up with a single mortgage at the end. How much we could borrow would be calculated off of the future value of the house. I don't really like this option because we would lose the 3.75 interest rate we currently have, I'm guessing we would wind up at 5% or higher.

(2) Cobble together a bunch of different loans: get a HELOC; borrow from one or more retirement accounts. Obvious down side that borrowing from retirement accounts seems like a bad idea, and I'm not sure if/how this would get us to $200-225k.

My good friends are planning on spending $500K on remodeling their news house before they move into but that is  roughly $1.1 million house.  They financed it by getting a HELOC which was nice when the teaser rate for the HELCO was 2%, not so nice that HELCO are over 5% now.   That was two years ago, and between problems with the architect and corrupt and dysfunctional planning department, they still don't have permits.  Fortunately, they've been FIRE for a while

I'd be really loath to give up a 3.75% 30-year mortgage. that is at least 1.25% lower APR than you are likely to find now.  So refinancing that is going to cost you ~$5,000/year for many years.

Basically, I'd do #2.

My first choice would be to get as big a HELCO as they are willing to give you, with your same or new lender. It is your cheapest money, it is tax deductible.   I'm not sure you can get a construction loan for an addition, but maybe.  Home improvement loans are typically limited to $50-100K and since they are unsecured rates start at 8% and go up from there, they are also not tax deductible. If you do have the option to borrow from your retirement account, it is even more expensive money but I wouldn't dismiss it out of hand.

Honestly, I'd wait for a year or two to let you save up more money, and let the home value increase so you can get a bigger HELCO. If you do have the option to borrow from you retirement accounts, I'd certainly considerate.

[Freedom2016]

Thanks, all! Good stuff for me to noodle on. That weird equity product sounds like a ripoff.

Clifp, I appreciate your input. I agree, I'm loathe to lose the 3.75. I looked again at the pile of cash we have right now, and then did a bit of research on HELOCs, and discovered that there may be options to get a HELOC up to 95% LTV. Which doesn't trouble me b/c our RE market is stable, plus house value will immediately increase due to the reno (so I'm not worried about being underwater). Anyhow, I realized that right now, today, we could get close to the $400k between savings+HELOC alone.

If we wait on the project for one more year we'll be in an even better position, both from a cash perspective, and probably from a home valuation/HELOC perspective. I must say I'm really encouraged to learn that. I was getting depressed thinking through how expensive a construction loan/refi would be.

Question for those familiar with HELOC's -- how much does household income play a role? I'm self-employed and had to document my income pretty extensively when we applied for the 3.75 mortgage. Is a HELOC as paperwork- and documentation-heavy as a standard mortgage process?

[Spitfire]

Question for those familiar with HELOC's -- how much does household income play a role? I'm self-employed and had to document my income pretty extensively when we applied for the 3.75 mortgage. Is a HELOC as paperwork- and documentation-heavy as a standard mortgage process?

Based on my experience earlier this year it is full underwriting and similar on the paperwork to a mortgage. I am an employee so I'm not sure how much documentation would be needed for self-employed.

Household income is used the same way, they will run a credit report and take your monthly income vs monthly payments (including the projected minimum payment on a maxed out heloc). Different banks may have different upper limits on debt to income ratio.

[clifp]

I found the HELCO to be slightly less paperwork than getting a conventional mortgage.  (I just converted my floating HELOC into a fixed 15 year @3%  a year ago.)

I'm retired and with no pension or SS, I was treated like being self-employed.  But my LTV was just 50%, so they tend to be more forgiving with that much equity.  I would expect having some difficulties find a lender that will allow both self-employment and a 90%+ LTV.  So avoid the mistake I made and don't spend money on things like an appraisal  until you sure you have sufficient income to qualify.

[Freedom2016]

Thanks clifp. Makes sense about the 90+ LTV re self-employment. Tells me we should hold off til we bulk up savings a bit more.

[monarda]

We are in the process of doing this, but our dollar values for our addition are lower than yours. Here's what we are doing.

1) Cash-out refi to 80%LTV (we got a lower rate than we had) to a 12 year loan 2.99%. This was before the project began.
2) paid first contractor bills with this cash and 0% credit card promotions, with the intention of paying of the credit cards with a HELOC once the house value is increased.
3) two years later,  a little short on money (project moving slowly because we are GC and not in a rush to finish)- got a promotional HELOC at 1.99% for the first year to pay off those expiring 0% credit cards
4) next year, depending on balances still due and current rates, might either do another cash-out refi (rate is still at 2.99% for a 12 year), or a larger HELOC, - once the final improved property value is on the books.

So, we certainly cobbled.

key point on edit:  our credit union's "rapid refi" for these 12 year loans and promo HELOCs have $149 closing costs.

[joe189man]

@Freedom2016 - how did your renovation turn out?

i was researching home addition costs and found your post, wondering if you ever did the addtion and how the #'s turned out?

[Freedom2016]

We never did it. Instead, we moved!

[affordablehousing]

Funny to just see this post come up again. We are finishing our project next week. Quite an odyssey. Not very mustachian at all we hired a GC to do all the work, with me doing anything that would be a change order given my limited time. Total costs soup to nuts came in at- $1,015 per square foot for new added space, $675 per square foot for total rebuilt and added space, and about $450 per square foot for what I'd call "affected space" where spaces were either rebuilt, added or remodeled. We paid in cash, bought the finishes we wanted, and even those ended up being a tiny portion of the budget, the bulk was labor costs. I feel mixed about the results. I wish it had been easier, but I did enjoy the struggle of it. I would do it again, only I would NEVER hire a GC again. What a waste for my personality-type. We had had bids much higher and I wonder whether those would have turned out better or the same, felt easier or not. I learned a tremendous amount, and the one thing I can say, is that with the market and the lack of homes for sale, we couldn't have paid our basis and costs to get what we got again (moved in 2018). For those considering it, the permit approval time is a blessing in disguise and really let me resolve some of the design ideas. I'm excited to figure out how to use out house the way it is now.

[joe189man]

how many SF did you add and what were the affected spaces?

I am envisioning you added space off a kitchen which required a kitchen remodel for those prices?

[affordablehousing]

It was a small project which also added to the cost. We demolished the kitchen, including tearing out the foundation, and rebuilt it 100sf bigger, added a bedroom and bathroom and office nook above it in a new 300 sf second story, added stairs from the family room to it, and rebuilt the front facade, put in a bit of drainage, seismically strengthened the addition, rebuilt and vaulted the roof over the family room, 3 new skylights and 17 new windows and redid the furnace and ducting. It's funny, it was a pretty big vanity project at the beginning, and while I consider myself no smarter, the rising market makes it look like a wise investment. I think of the $400K or so we spent, it probably increased the property value $300K or so in my initial estimate, to $1.3MM, but to get a same size home now would be more like $1.7MM, and we'd be uncomfortable spending that much, plus still putting in the finishes we'd like. Not sure it's a process for everyone, and I think the economics suck compared to the effort required, but we got it fairly close to the way we wanted it.