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Should I use a construction loan or cash-out refinancing to renovate my attic?

Q. I have a home that is worth between $400,000 and $425,000 and we have $182,000 for a mortgage at 6% for thirty years with 27 years to go. We also have a home equity loan for $35,000 at 9.25% for ten years. We are planning on finishing our attic space to add three bedrooms and one bath to go with two bedrooms and two baths. I would like to do a cash-out refinancing to get the $75,000 we'll need. One mortgage broker I've dealt with before said to get a construction loan and have the work done before I refinance. But the rates are pretty good right now and if I can get the cash out, wouldn't this be the best way to go?

A.After running some numbers, we think so.


It looks like you're paying $1,091 a month on your 6%, 30-year mortgage -- that's principal and interest only -- and $448 on your 9.25% home equity loan. If you borrowed an additional $75,000 to finance your attic renovations through a construction loan it would probably cost about 8.25% and add $515 a month in interest payments for a total of $2,054 a month.

If you did a cash-out refinancing you would have $285,000 in debt -- a $175,000 mortgage, $35,000 home equity loan and $75,000 for the attic. If you qualified for a new, 30-year fixed-rate mortgage at 6% your monthly payments would be $1,708.

You'd also be looking at only one loan closing instead of two, which also would save you money.

One final thought: Make sure you have a little cushion built into the cost of your addition. These kinds of projects are famous for running over budget.

By: home-equity.interest.com

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