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203k vs home equity loan?

We are remodeling and have been offered a home equity line of $10k and a 203K-style FHA.  We plan on staying in the house for 5-7 years and currently have a 6.25% cconventional with .50% of that being lender paid PMI.  We can do the $10k for the remodel but would prefer more like $20k, but we do not have enough loan to value to gget higher (currently at $192k owed on around $215 value).  WHAT TO DO?!  If we refi with the 203K we are stuck with FHA PMI for 5 years, AND we lose all of the equity we have put into the house as we will get another 30 year loan.  Should we take the equity line and wait until after the remodel and take our chances on a refi without PMI since in theory we will be closer to being below 80% loan to value? Or should we try the 203K?  Thank you!!
  • February 25 2011 - Columbus
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Answers (10)

Now that I see you are putting more than 10k into the renovation yes that makes the most sense.  When you refinance you'll want to just refinance your first mortgage and resubordinate the second otherwise you'll have to take a higher rate on the new first mortgage because it will be treated as a cashout transaction. 

  • March 02 2011
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I would say take the home equity and then pay extra on the home equity loan you will want to pay the extra on this for a few reasons.  At the right time (and I don't know when that is going to be) refinance and if it won't all fit at 80% you can always split into an 80/10 or 80/5 and not have the pmi on the first mortgage.

All money owed on the property needs to be considered when you refinance.
  • February 28 2011
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Again, thanks for all of the help.  The $10k is a home equity line and we have already been approved at 3% over prime, after all of the discos it is either 6.75 or 7%.  I think what would be best is to do the $10k and just wait to refi until we are below 80% to refi.  In theory getting to 80% shouldn't be too difficult if the ROI in the kitchen.  At our current rate of paying extra principle we could reach that number in two years.  And if we add $20k of value to the home (we are putting more than $30k into it) then we would need to get to $184k to have better than 80% LTV.

But does the $10k home equity line add to the LTV, or is it considered separate?  
  • February 28 2011
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If the 10k is sufficient then no it wouldn't make sense do a 203K but if you need more you can do the 203K. If you need the 203K You can actually take a slightly higher rate and have the lender pay the closing costs.You'll still have the increased MIP. That aside at 6.25% you may want to see if it make sense to refinance. I haven't seen any banks go above 89% on a HELOC where are you getting the 10k line of Credit. Is this an unsecured personal loan or is it going to be tied to your property?
  • February 28 2011
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Hi,

The HELOC, or second mortgage will need to be paid off when you sell the home, and can be done at closing. The amount will come out of any equity at the time.

I do have a question though. Based on our current value, is there a lender that will give you a $10,000 home equity loan/line? Your only choice may be to go 203(k), or HomeStyle to get the money you need.
  • February 28 2011
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Thank you all for the help.  The remodel is in the kitchen, which historically offers a high ROI.  In theory if we can swing just $10k home equity now, we will be able to apply to have our PMI dropped once we reach 80%?  So is it worth it to incur all of the associated closing costs etc for the 203k?  If we sell in 5-7 years that seems like a lot of up front costs that will be rolled into the loan.  I am just looking at the base numbers and we would essentially go from owing $192k with 324 payments to go with a $10k home equity loan to owing $215k with 360 to go. 

Either way we can still do the remodel the way we want, it is just the overall out of pocket now we must consider.  We have also been offered a 5/1 ARM since we are planning on moving in 5-7 but that just seems like it leaves too much to chance.

One last question: how does the $10k in home equity hang on our mortgage/ credit?  I have heard that we must pay it back by the time we sell, but at $10k I don't think that will be a problem.  Thank you in advance!
  • February 28 2011
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If the value of your home is $215k then to be at 80% LTV your mortgage balance would need to be at $172k.  Taking 10k to remodel your home isn't going to do anything to reduce the debt on your first mortgage(unless you use it to paydown the first mortgage) and it is very unlikely to increase the value of your home. You can't increase your square footage with 10k.

If you need 20k for your remodeling then the 203K is your only option. Yes it comes with a price tag.   The 20k will cost over $3k in closing costs (lender fees, title costs, state fees, 203k program fees), plus increased MI expenses + over 2K in UFMIP that will be financed into the loan. 

You will have some savings due to the fact that you're currently paying 6.25% on the money that you have borrowed. But it will cost. You just need to decide if the cost is acceptable.  If it is you'll want to do it before the middle of April with the FHA monthly MI goes up another .25%.

  • February 25 2011
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I understand that you do not want to pay pmi, if you do not want to. If you think that the as completed value of the home will be high enough, you can look at doing a FNMA HomdStyle loan. If you have 20% equity, after the work is done, you will not need to pay monthly mortgage insurance.

Just a thought...
  • February 25 2011
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How do you propose not to loose the equity if you are pulling an additional 20K in cash out of the home.  A 203K will be 1% below your current rate and allow you to complete the renovations the way you want.  Apply the payment savings to principle to improve your equity position.
  • February 25 2011
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You don't indicate exactly what you are remodeling so it is difficult to assess the entire situation.  It is very rare that anyone will recoup the costs of a remodel dollar for dollar so the assessment that finishing the remodel will net you 20% equity may be a stretch.  Additionally, it is very unlikely that the cost of any remodel will be equal or less than the initial estimate, so it is important to be realistic about the input versus the output of dollars.

Not sure I understand the rationale that you would be "giving up" the equity you have put in the house if you refinance to a new FHA loan.  One, there is no prepayment penalty on an FHA loan so there is no preventing you from making additional principal reduction payments on the loan.  Two, your current interest rate is considerably higher than market so your payment may well do down despite the increase in the loan balance.  Three, the 203K requires an appraisal of "future value" after the remodel which vitually guarantees that your loan to value (equity base) will remain in tact.  

Also, bear in mind that the FHA loan is fully assumable.  So if you are planning on selling in 5 - 7 years you are positioning yourself to sell with the possibility of assumption at historically low interest rates...not a bad sales strategy.

Hands down, I vote for the 203K.
  • February 25 2011
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