My question is: Would it pay for us to have the home value reassessed,
take a cash-out option and refinance with a fixed 30-year mortgage,
using the cash (from equity) to pay for the home improvements or additions?
One of my concerns is that with a home equity loan, or second mortgage,
we would have less time to pay and bigger payments. And do we have
to claim the cash we get from the equity as income for tax purposes?
We bought our home for $148,000 in 2001 and switched
to a 15-year mortgage early last year at 5.25 percent interest.
We currently owe approximately $128,000 on the mortgage. With the
recent boom in this area's real estate market, homes now go for
more than double what we paid for our home and the homes are smaller
than ours and on less land. We would like to stay in this home but
add on a room or two.
Does it make more sense to just sell this home
and move into another larger home? We realize whatever way we do
this, our taxes, etc. will increase. We live in Southern California
about one hour away from Bakersfield. --
What bothers me is that you've only been in this house for four
years and you're already considering your third mortgage. Closing
costs on first mortgages are expensive and you're changing horses
too often. That said, the money's spent on the closing costs for
the prior mortgages and you might as well figure out what's right
for you now.
Look at total costs including closing costs and interest
expense when comparing mortgage alternatives. When in doubt go for
the longer term. Barring a pre-payment penalty, you can always make
additional principal payments on a 30-year mortgage but the large
payments associated with a 15-year mortgage are contractual. It
sounds like this may be a problem with your current mortgage and
at least part of the reason why you're considering replacing it
with a cash-out refinancing with a new 30-year mortgage.
A cash-out refinancing with a 30-year fixed rate mortgage
will give you much lower monthly payments than combining your current
15-year mortgage with a home equity loan, but the 30-year amortization
will mean high total interest expense and higher closing costs.
You can get a home equity loan structured just about
any way you want it. That includes getting a 20-year amortization
or a 30-year amortization with a balloon payment after 15 years
on a home equity loan. Compare rates and closing costs on the home
equity loan against those for a traditional first mortgage.
Living in a house during a major addition project
isn't much fun but I'd lean toward adding on vs. moving, as long
as it didn't give you the biggest house in the neighborhood or put
your expected real estate value outside what's normal for your neighborhood.
Sell the house and move to a bigger place and you
could pay 6 percent in real estate commissions on top of closing
costs for the mortgage on your new home. A for sale by owner approach
could work for you, but there are costs to that too.
When you borrow against the equity in your home,
you don't have to declare the loan proceeds as income for tax purposes.
You haven't realized a profit, you've borrowed money.