September 17, 2010, Newsletter Issue #236: Second Mortgage Beneficial for Home Improvements

Tip of the Week

When you want to do some major home improvements, you have a few choices. You can refinance your first mortgage, borrowing the amount you need for your improvements along with the current balance of the mortgage. The interest rate should be most reasonable and you can choose to repay the balance over 30 years to keep your cash flow reasonable. The downside to this option is the expense of closing a first mortgage, which can easily exceed $1,000, not counting any points involved, which might increase this cost significantly.

A second mortgage or a home equity line-of-credit (HELOC) is often a better, more cost effective option than a first mortgage refinance. If you have created your budget and are confident in the final cost of your improvements, a straight second mortgage allows you to generate the funds you need and for them to be at your disposal quickly. If your project is scheduled to take place over a longer period of time, a HELOC may be a better choice since you will only pay interest on the balance outstanding at each month end. Should the bulk of your home improvements not require payment until some months into the future, you might find a HELOC, which allows you to disburse your loan proceeds (and add to its balance) as you need the money, to be the best choice. This loan type might save you large amounts of interest cost. If done right, your property will increase in value as a result of these improvements so your equity may still be healthy.

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