Question about refinance vs. home equity vs. builders loan for major work.

[woodsprite]

We had some damage to our house during Sandy. Not enough that we were displaced, but enough that the entire end of the house is going to need to be rebuilt from the studs/cement slab up (garage, den, & loft). It will also need to be updated to meet current building code. The insurance company is going to take care of the basic price on those things and we have a rider that will contribute up to 20K for updating things to current code, but we wanted to upgrade flooring/insulation, add a dormer to the rebuild and reroof the main part of the house so it the roofs match (it could entail bringing that roof up to code also).

We are still with our original mortgage company (10 yrs) and were contacted a couple weeks ago about refinancing. We're comfortable with the payments and thought we could refi and roll the upgrades into that. But when a house is refinanced, don't they have to come out and assess the house? Since we have a huge gaping hole in the den and loft, I don't think that would work. Houses in our neighborhood are going for about 80-100K more than what we paid for ours 10 yrs ago, so if it hadn't had the damage, I wouldn't think they'd have a problem coming up to a decent current market price. HOWEVER, it does have the damage and we would like to use the money to upgrade the fixes.

Has anybody run into a similar situation? We did have a loan for all new siding and replacement windows about 7 years ago. The window/siding company handled the financing for that, so I've never had to 'shop' for this type of thing before. Has anyone ever gotten a 'builders' loan when they had a large addition or major construction done on their existing home? Are they only for new construction? I'm not sure even who to start with - a bank or our mortgage co. Our mortgage co is holding the insurance payment to the builder in escrow, so it's not like they don't know about the damage. It will be doled out at certain checkpoints during the rebuild. They will also hold the final payment until they inspect the work.

If anybody has had any dealings like that, can you point me in the right direction to get started?

[Hassin Bin Sober]

1. Yes they will want to do an appraisal inspection.....

....prior to closing on a conventional mortgage loan. Also, your area will be flagged for storm damage so all loans will get extra scrutiny (additional inspections for loans in process prior to storm etc.)

You need a rehab loan. This is a tricky situation and I don't know the answer (I'm in the mortgage business).

FHA has some rehab products but you have to pay mortgage insurance even if the 20 percent equity is there. Also, FHA requires upfront mortgage insurance premium (MIP) as a percentage of the loan amount.

[Wash. state Desk Jet]

2. Home equity -looking into that too.

I would imagine a real estate appraisal might be a good a place as any to start so you can get a better idea of the worth of the house/property -Realtors do it for free sometimes or for a small fee. Don't know that I would rely on the bank to do an appraisal. Home improvement loans based on equity was a good way to go ,but those banks got pretty iffy on that.

I can go back five years or more on remodel loans- case where the clients bought a building and secured a sizable loan to convert the office building into something more suitable.A matter of changing over from a wing in a high rise to their own commercial building. I think they used Wells Fargo and had a lot of good things to say about that bank along those lines. They also have advisor's on hand at that bank for your situation. Actually the bank you choose for this is important-not just any bank will do. You want the best deal available.

Now on the storm damage issues, I am not at all sure how the banks respond to that. Bin Sober seems to have a handle on what goes on with those banks under the circumstances.

No matter what you do ,you want to put your money in the areas where you will see a return at the time of sale as your home is your greater investment.

A home property appraisal may be the place to start. Because in that appraisal will also be potential worth through upgrades.Where to spend and where not to spend is all and important.
With that a appraisal /assessment separate from the banks assessment/appraisal you would be better positioned to lay out your ideas for upgrades in line with increased value.The worth of the house property after upgrades- renovations ,remodels so on.
The bump outs-dormer-s should add to the worth.A common practice when flipping an old house.

And on a side note- I don't know that I would trust any contractor outfit your insurance company suggest you use.! Usually such outfits work in cahoots with the insurance company which isn't good for you. !

[roody]

3. I think you will get the lowest interest

rate on a refinance of conventional mortgage.

[woodsprite]

4. Yeah. I've been researching cash out mortgages as well as straight refi w/ addl loan.

Our development has increased by over 1/3rd - even in these markets. Also, it looked like we could still keep our term (20 yrs left) and monthly payments the same. It does look like we could do better on the rate no matter what (we're at 6.75 currently). Trying to identify some places to talk about options to people. With the banking bailouts, I'm wondering who would be the safest to deal with, but we haven't heard anything bad about our original lender, so we'll start there first. Also, they're holding a portion of the ins checks in escrow. Don't know what monkey wrench would get thrown in the mix if we wanted to refi with a different entity at this point.

Spent some time this weekend trying to figure out exactly how much extra we would need to do the major type work we can't do ourselves.

Thanks for pointing me in the right directions. I hate banking stuff, but hubby just kinda shuts down when any figures get to be over 4 or 5 digits, whether its car, house, college, etc.

[Hassin Bin Sober]

5. That "monkey wrench" is what concerns me.

Sure, a conventional mortgage IS the best game in town.

But the house has to be in working condition to GET a conventional loan.

Should you have the repairs made and THEN embark on the major reno? Maybe. It's not the most economical way to do it from a construction standpoint but it might be the only way to avoid rehab loans, multiple closings, multiple appraisals and refinancing to an end loan (and all the expenses this entails).

Under normal conditions I would advise you to take you cash out in either a cash-out first or home equity line of credit (HELOC) not telling the lender that you are planning a major reno. But you can't do that with the house damaged.

The lender doesn't really care if you are only doing kitchens and baths or other major "upgrades". But they get involved if you start messing with roof changes and foundations or major exterior wall moving activities. They want architect/engineer plans and they want to disburse funds on THEIR schedule so they are not on the hook for uncompleted work (see: hole in the ground where their collateral used to be and a contractor who skipped town). Note: This is how things work in practice but I suppose even gutting your kitchen might technically violate your mortgage agreement by "affecting the home's marketability without the written consent of your lender".

Is not telling your lender your true plans a little shady? Sure, maybe. But it's not like you are doing a tear-down - lenders don't like it when your client tears down their collateral and sometimes neighbors snitch. I've heard of that happening once to a colleague's client.

I once put a HELOC in process for my brother who needed a little extra money to finish up an addition he was putting on his home (he's a contractor). I made the mistake of saying the word "addition" - DENIED. Oh did I say addition? I meant screen in his back porch - APPROVED.

Maybe the only above board way to do this is to have your lender make a rehab loan for you and release the insurance check as part of the disbursements.