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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:

  1. 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?

  2. 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.

  3. 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?

  4. 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.

  5. 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?

  6. 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.

  • Would your family consider selling your the portion of the land where this second house would be built? It may then be possible for you to get a mortgage to buy the land and build a house. – yoozer8 Apr 19 at 21:00
  • This isn't a very good option right now because Im trying to get the loan within weeks, the permit is basically approved – Mich Apr 19 at 21:11
  • It would seem like a construction loan would be the way to go, that would give you time to subdivide the land if necessary before getting a separate loan, so as not to have to lose the mortgage on the 1st house which is at a good rate. Also, the mortgage on the 2nd house would not be a 'jumbo' loan, which makes things a little easier. – Glen Yates Apr 19 at 21:49
  • What's the purpose of dividing the property? I feel like this is an unnecessary step. – Mich Apr 19 at 23:29
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The first option costs: 0.45% of $750,000 paid back over 30 years, plus 4.2% of $250,000 paid back over 30 years. The second option costs 6.0% of $250,000 paid back over ten years.

When you compare costs, you need to assume equal payments. So in either case assume you pay back the $250,000 over ten years. So initially the extra interest is 3 * 0.45 + 4.2% of $250,000 = 5.55% of $250,000 vs. 6.0% of $250,000. But in the first case, you still pay 0.45% of the biggest part of the mortgage extra for the next 20 years. Option 2 is definitely better.

The third option is to check with different banks if anyone is giving you better terms, and that's most likely the best option.

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Consider refinancing the house to fund the additional construction but pay $6300 a month on the mortgage instead of $5000.

  • How would this be any better than having another loan? Is there a reason you recommend to refinance? – Mich Apr 19 at 21:12
  • A 28 year loan is refinanced only to 30 years but the 30 year loan at 4.2% can be paid off early to gain advantage over a second loan of 6% for 10 years. Then ultimately there is the option of not paying off early. – S Spring Apr 19 at 21:17
  • As far as I understand, the 30 year mortgage loan is not possible to pay off early. – Mich Apr 19 at 23:28
  • Why would anyone want to refinance at a higher rate? – Mich Apr 20 at 0:03
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    "As far as I understand, the 30 year mortgage loan is not possible to pay off early" @Mich it seems you have some research to do before you are able to evaluate your options. – Ben Voigt Apr 20 at 15:19

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