Cash our Refi, HELOC or Home Equity loan? Please help! (PMI, fixed rate)
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About to get the ball rolling on a kitchen remodel.
I'm still a bit confused as to what method I should use to pay for this. Cash out refinance, HELOC or a home equity loan. My current, original loan is an FHA loan which means I'm paying a monthly mortgage insurance until I get it down to 78% of the original loan, which wont be for another 1.5 years or so.
original loan amount: 140k
current balance: 120K
current estimated value: 240k (on the low side)
amount needed for renovation: 45k
current loan interest rate: 3.5%
800+ fico
Cash out refinance would raise my interest rate by .25% + closing costs, appraisal, etc.. But I'd get to stop paying MIP.
Equity loan - higher interest rate, lowest I could find was about 5.6% via a credit union. Not sure if there are closing costs with this
HELOC - not really clear on how these work. I need the money in one lump sum. I hear that some of these require you to carry a balance for like 10 years.
If we go with an equity loan, we're gonna throw money at it to pay it off asap, much like we've done with our vehicles. I'm hesitant to refinance because of my interest rate and well, i'm a creature of habit who doesn't like to mess with things that are set up already. Then again, if I refinance, I guess I could always just pay for some points to get it down to 3.5%. Also, not having to pay the MIP on my original FHA anymore would be a little bonus, then again, I wont be paying it much longer anyway.
Hoping someone here who's been through this could just say, "DO THIS BECAUSE IT MAKES THE MOST SENSE!"
I personally like Penfed 5/5 ELOC product. Fixed rate for 5 years and resets ever 5 years. Line is open for 15 years for owner occupied. If you don't close the line before 24 months, you don't have to pay back the closing cost. It's relatively inexpensive to obtain the like (pay appraisal only). You get a booklet of blank checks and draw as much as you need available. Current rate is 3.75%. They do run promotional once a while where new draw are as low as 1.9%. I just got an offer for 2.9% for 1 year.
There are a few downside.
1. Line are at 25K increment
2. Monthly payment is high. Say you take out $50K, your monthly payment is $1000
3. If #2 is a concern for you, there are ways around that. You can technically turn it into an interests only payment.
How much is PMI for that 1.5 years? When did you buy the house? Hopefully before May 2013. Because after that I believe PMI on a FHA is for lifetime unless you refi. If the cost of PMI over 18 months is higher than your refi costs refi.
Out of those choices
If your PMI is a lifetime I would cash out refi. Either way I would cash out refi as first choice. You can beat the .25 increase by making extra payments.
HELOC would be my second choice. It's basically like a credit card using your house as collateral
get a 0/0 no cost cash-out refi and go to a 15 or 20 year term. do not look at it in terms of payment - look at it in terms of total costs and eliminating debt. I don't know how big your kitchen is.. but you can remodel for much less than that...
also consider - if possible - getting a mortgage that is assumable. When rates rise it is going to be harder to sell homes and the ability to pass along a low-interest mortgage is going to count for something...
I just ran you through our pricing engine @ 180K (75% LTV) and it spit out 3.75% 30 year fixed (3.798% APR) Your LTV and credit score are saving you from rate bumps. P&I = $833.6 . So let's say I am at the low end - I think you could expect to be able to find someone local for no more than 4%.
Now, the downside of fixed: you don't have flexibility on what you spend, you owe what you borrow, if you needed it or not. Higher closing costs. However, I am of the opinion with a HELOC, if you do not see a way to pay it down or off (like you plan to sell in a few years), you are setting yourself up for a refi anyway.
Oh, and the reason for 180K? Not all for closing, lol.....but because every single home improvement job ALWAYS come in higher. As soon as a floor or wall is torn up, hidden problems are suddenly seen and must be handled. And reason #2, the minute you cross over 75% LTV, your rate gets bumped by 1/4%. Also, play the numbers in your head, what happens if value is low? Really study sales in your neighborhood. Have a plan B.
Rates are volatile right now. You can easily expect to see some crazy swings. Most of the market went up Friday...with a little work, you could find someone before they are re-priced on Monday.
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