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Old 06-28-2011, 09:38 AM
 
547 posts, read 1,429,926 times
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Hi All,

Let's say for argument's sake I have a home worth $350,000 and owe $270,000 on the note. Equity then is $80,000, or 23%. Let's say I'd like to do a large addition that costs $100,000.

What are my options in financing this? As I understand it, I have to keep an 80% LTV ratio, so although I have $80,000 in equity I would only be able to pull out $10,000. $350,000 x 20% = $70,000. I have $80,000, so to keep $70,000 in I can only pull out $10,000 max. Do I have this correct?

Let's say I'm in a strong real estate market where homes sell for a minimum of $300 per square foot and I'm looking at construction costs of $150 per square foot. Prices are stable and trending upward. Is there a way to tap that $80,000 considering the future value the house will be worth after the addition is completed? Or is that type of single-close financing pipe dream that went out with the great recession?

If I complete the addition, I'd be looking at 560 square feet of added liveable space, plus a garage, plus a high end rooftop deck. Just at $300 per square foot x 560 square feet we'd be looking at a $168,000 boost in equity not counting the new garage and deck with views. I think it would be reasonable (for rough ballpark figures) to say value would be boosted $200,000 on a $100,000 project, giving a final value of maybe $550,000. Does this aid me in coming up with a $100,000 loan here?

Any help would be greatly appreciated!

Thanks,
WBJ
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Old 06-28-2011, 10:04 AM
 
Location: San Antonio, Texas
3,503 posts, read 19,821,475 times
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I think your overthinking how to finance. In today's atmosphere, things are not black and white. Some lenders will finance the addition and some won't. I would go shopping to talk to different lenders. Start with who carries the mortgage now and go to a credit union and other lenders to get a feel for attitudes on finance. The economy is dictating lending practise. Your math and logic are good, except your not dealing with logic in today's lending market.
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Old 06-28-2011, 10:29 AM
 
Location: Morrisville, NC
9,126 posts, read 14,673,466 times
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The bank does take into account the projected final value of the home when lending for an addition (or at least they used to), so you are probably OK, but like ShaneSA said, its all wacky now. I wold just call a mortgage person at the bank of your current note first to see what they can come up with. If they have a good enough deal, it could be easier dealing with them.
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Old 06-28-2011, 01:59 PM
 
Location: Portland, OR
1,454 posts, read 2,481,158 times
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I built an addition with a pretty high-end finish in a supposedly stable RE market (Austin, TX). In a sliding market it ended up not adding a single $0.01 to the ultimate selling price 5 years after it was built.
I'd be very wary about pulling out equity in the hope that it will add any value in such an unstable market. Of course your market might be totally different to the rest of the country and I doubt you are looking to add value, just space for a growing family.

- Tim
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Old 06-28-2011, 02:08 PM
 
547 posts, read 1,429,926 times
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Quote:
Originally Posted by timfountain View Post
I built an addition with a pretty high-end finish in a supposedly stable RE market (Austin, TX). In a sliding market it ended up not adding a single $0.01 to the ultimate selling price 5 years after it was built.
I'd be very wary about pulling out equity in the hope that it will add any value in such an unstable market. Of course your market might be totally different to the rest of the country and I doubt you are looking to add value, just space for a growing family.

- Tim

A coincidence, but I am actually in the Austin area as well! I live in the Zilker neighborhood. I've contacted one lender and they said they do not consider the final value of the home, which means they'd give me a loan for just $11,000.
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Old 06-28-2011, 02:27 PM
 
10,135 posts, read 27,360,867 times
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You go get a credit line attached to your house, carefully disburse the funds to teh contractor as the work progesses, each time confirming that all labor and materials have been fully paid by him, and lien waivers obtained. When you are done, you refinance the existing mortgage and credit line into a new term loan.
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Old 06-28-2011, 03:35 PM
 
28,455 posts, read 84,971,395 times
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There are at least three options for the financing. The least risky,from the lenders standpoint, is a HELOC -- they let you tap the equity UP TO their limit (which is generally 80% of existing value).

The "old fashioned" way of financing renovations is also not really make riskier to the lender -- they look PRIMARILY at the borrowers' ability to pay and essentially don't care what you spend the money on as it is just a kind of "personal line of credit". The rates on these are typically not nearly as competitive as HELOC because the lender is just about giving you a credit card to spruce up your house.

Something in the middle is what many savings and loans / credit unions used to have as "bread and butter" before HELOCs took over. There is more shared risk with a "traditional home improvement loan" but the lender will essentially write it the same as they would a "construction-to-permanent" loan for a new house. The lender does have more expenses, as the lender will utilize their staff or a third party to verify the estimated increase in value as well supervise the builder to ensure that draws are only paid for work done. These costs are typically wrapped into a HIGHER interest rate. The goal is to have you end up with a COMBINATION of the first mortgage on the existing house AND A SECOND FOR THE ADDITION that together are going to result in a better rate than if you refi'd the whole thing to extract all equity. Of course with SO MANY lenders being in disarray and so many areas experiencing severe declines in value the kinds of projects that will qualify for this sort of financing are much narrower than when lenders did things that resulted in a record number of bank failures...

It may be that you NEED to essentially hire a remodeling firm that has a solid enough track record with lenders that they will dictate how the project goes -- not ideal but for certain kinds of projects this might be easiest.
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Old 06-28-2011, 03:47 PM
 
547 posts, read 1,429,926 times
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Quote:
Originally Posted by chet everett View Post

It may be that you NEED to essentially hire a remodeling firm that has a solid enough track record with lenders that they will dictate how the project goes -- not ideal but for certain kinds of projects this might be easiest.
Chet this post was tremendously helpful and what I was looking for; thank you so much. I found a local credit union that says on their main page they will give construction loans based on on the future value of the completed project. I e-mailed them and will have to wait and see if that is still true. I didn't think of just bringing it to the architect and/or builder and letting them make some things happen. When I have my preliminary meeting with the architectural firm I will bring this up.

It sounds like I will have better luck with local credit unions. This might especially be true because local banks would know firsthand the economic viability of this particular neighborhood which has always been and will continue to be in high demand, whereas a national bank might just write off everything as risky.
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Old 06-28-2011, 04:15 PM
 
28,455 posts, read 84,971,395 times
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Default Glad to help!

Over the years there have been a number of folks that I helped to buy older homes and there are about half a dozen very professionally run renovation firms that specialize in this sort of thing in the suburbs of Chicago.

I imagine there similar arrangements in Austin. Some of the firms have a dedicated "finance liaison" that will help to get the right information to the lender to get the project moving.

The potential downside is that with the renovation firm having a finite amount for you to spend certain items are going to be "outside of the budget" or maybe you have to re-think the scale of the project, but overall having the renovation firm and the lender on the same page minimizes headaches...

Good Luck!

Quote:
Originally Posted by buffettjr View Post
Chet this post was tremendously helpful and what I was looking for; thank you so much. I found a local credit union that says on their main page they will give construction loans based on on the future value of the completed project. I e-mailed them and will have to wait and see if that is still true. I didn't think of just bringing it to the architect and/or builder and letting them make some things happen. When I have my preliminary meeting with the architectural firm I will bring this up.

It sounds like I will have better luck with local credit unions. This might especially be true because local banks would know firsthand the economic viability of this particular neighborhood which has always been and will continue to be in high demand, whereas a national bank might just write off everything as risky.
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Old 06-28-2011, 04:33 PM
 
Location: Houston, Texas
10,447 posts, read 49,527,050 times
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I always agree with Chet. He is one of the smarter posters in the home forums with myself. His advice is good except I wonder if his positive thinking is just a bit too positive. I too have my finger right on the pulse of this industry and what I see is no banks are lending for residential additions and few are lending for new construction unless their risk is zero.

You said something about lending on future value. No way. For the first time in American history, homes are depreciating at a faster rate then automobiles. There is no future value in our sights unless of course you listen to the crooked corrupt politicians who paint a rosy picture of the economy which they even refuse to name properly. We are in a worse depression then 1928 and things are deteriorating further. By all neutral non government statistics we are in a deep DE-pression. The Re-cession ended in 08.

All that said...why in hell would you want to put that kind of money into a losing depreciating asset? That is crazy. Within another year or so 30 year mortgages will be non existent as they come to an end. In 10 years we will be a nation of renters. Who who would be able to afford to buy your over sized house some day?

More power to you and your dreams my friend. Pipe dreams that is.
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