I'm looking into advice and options to get a loan to pay for a construction project at home in the United States.
Here is the situation:
My family and I are living at one residential family home, they have a mortgage on which they still owe $750,000 with a good interest rate of 3.75% for another 28 years. Monthly payment on this now is $3,500.
The construction project will cost $250,000 including all the permits and fees. The construction is for a second smaller house, which will be my residence for a few years, and then rented out when I choose to relocate.
One option is to refinance the mortgage now and end up with a $1,000,000 loan at a higher interest rate of around 4.2%. This will increase the monthly payment to around $5,000 and reset the clock back to 30 years.
Unless someone can convince me otherwise, I think this is a terrible option, Just doing simple math on the number above will put us at a difference of $5,000*12*30 - $3,500*12*28 = $624,000. Meaning that we would increase our total money spent over 30 years by $624,000 just for a $250,000 loan. That to me is unacceptable, and in general, I believe no-one should ever refinance when the interest rates are higher. The only benefit of using this option is to have smaller monthly payments.
Second option would be to take a home equity loan. Because the appraised value of our house is higher than the purchase price, we should be able to qualify for a home equity loan of $250,000 at a higher interest rate of around 6%. And pay it off within 10 years. A simple mortgage calculator on this shows total cost of around $333,000 and monthly payments of $2,800. Since this will be my future residence, I can afford this payment for the next 10 years with my current and future job situation.
I have some technicality questions:
I'm not an owner of the original mortgage, my father is, also, I'm not on the property deed, for now, am I correct to assume that I cannot take out the home equity loan and make payments in my name? And it has to be done by my father?
My preference is to pay this loan off as fast as possible using most of my available income, is this possible with a home equity loan or does it have to be over a fixed time frame? I will be receiving stock bonuses in a few years which will I can use to pay off a large portion of that loan, and I would like to be able to do that.
If the interest rates should drop below the the current ones, are we able to refinance the home equity loan into 1 mortgage even if they are with different banks?
What other types of loans would you recommend? I looked into construction loans, but those need to be re-financed after a year. And it looks like personal loans cannot be higher than $50,000.
Is it possible for me to take out a loan in my name? Or does it have to be done by my father? And is it possible to set up money transfer so that I would be paying for the loan directly without having to write checks?
Is there any kind of down payment needed?
In general I'm the type of person who buys everything for cash value, and this will be the first time I would ever owe monthly payments on anything other than rent (and I would consider this to be rent as well). I have a good credit score of 749. Additionally, my father will hit his retirement age within 10 years, and having two separate loans, which we pay for separately for the next 10 years and finishing the first loan for 18 more years by myself, or by renting out a portion of the houses just seems like a good idea.
I'm looking for a type of loan that I can pay off with different amounts of cash as I earn it. I don't want to have a fixed monthly payment, and I don't want it to be an issue if I don't work for a few months. Adjustable interest rates are acceptable as well.
Side note: There is a lot of sensitive information in this question. These are just numbers. And this is all I'm going to provide, I will not be posting any kind of personal information in response to any comments. Also, I am not looking for a loan officer or a bank to contact me, so those requests will be ignored. If you have a suggestion for a specific bank or institution, I will do the research and contact them myself.