Personal Finance

Refinance mortgage to complete home reno

  • Last Updated:
  • Aug 19th, 2020 5:14 am
[OP]
Newbie
Jul 17, 2016
66 posts
5 upvotes

Refinance mortgage to complete home reno

Hello,

Apologies if this is not under the right sub forum.

My wife and I are one year in to our current mortgage. We are looking to finish off the basement of our house by putting in a nice 3 piece washroom. My plan is to use any extra cash from our loan to buy out our car outright rather than continue with our monthly payments. We would be borrowing roughly $30, maybe $40K if we decide to do some other projects around the house. I have about $20,000 in savings but I obviously keep that for investments, unexpected emergency costs, day care for our child etc...

We were offered a $15K line of interest with 7% interest. The other suggestion made by our bank was to refinance our mortgage. We are currently on a 5 year term (25 year amortization) at 2.59%, and they would add the new $30-$40K loan at about 2.19% which is current rate. There will be no fee for breaking the mortgage early since we are staying with same lender, the only cost will be $950 for lawyer fee/property valuation.

Does going forward with this make sense? Is there a better way of borrowing that I am missing?

Any input is appreciated! Thanks
12 replies
Deal Expert
May 30, 2005
44554 posts
5120 upvotes
Richmond Hill
What's the interest on your car payments? If you got any sort of good offer on the financing, it probably won't make sense to pay it off in full.

How long are you anticipating it will take for you to save up or pay back the extra 30-40K?

Usually people refinance for much more than 30-40K, the $950 fee will eat into your effective interest rate.

Without any additional information, or any other liquid or semi-liquid assets (such as stocks, MFs, etc.) my first impression is that you may want to reconsider the reno right now. 20K in savings is not a lot especially with a child. How many months of expenses will that cover?
Artisan woodworker crafting live edge tables, end grain cutting boards, and other home decor
Silver Coins | Philips Wake-Up Light with Radio | Heatware
[OP]
Newbie
Jul 17, 2016
66 posts
5 upvotes
Jon Lai wrote: What's the interest on your car payments? If you got any sort of good offer on the financing, it probably won't make sense to pay it off in full.

How long are you anticipating it will take for you to save up or pay back the extra 30-40K?

Usually people refinance for much more than 30-40K, the $950 fee will eat into your effective interest rate.

Without any additional information, or any other liquid or semi-liquid assets (such as stocks, MFs, etc.) my first impression is that you may want to reconsider the reno right now. 20K in savings is not a lot especially with a child. How many months of expenses will that cover?
I'd argue $20,000 in savings is pretty decent considering we are mid 20s, have no other debt besides the previously mentioned car. We put $90,000 down payment on the house and have paid off all student loans prior to the birth of our child this year. This may be very naïve of me to say, but we both work in health care in unionized jobs so I have no concern of either of us ever losing our job, or worst case scenario having to find another job in our field wouldn't take long.
Deal Addict
Jan 1, 2013
1721 posts
926 upvotes
Durham
What is your loan to value like right now? I would do it once you are not going close to 80% as a finished basement does bring up the value and also gives you that enjoyable space if staying for awhile.

I would never add a car loan to a mortgage. Car loan is open so can pay down as much as you want and if bought new, your int is probably lower than the mortgage, so why amortize it for that long?
Deal Guru
User avatar
Mar 23, 2008
11502 posts
7790 upvotes
Edmonton
Replacing your car loan with additional mortgage dollars doesn't make sense to me. In effect, you'll be paying off your car for the next 25 years, so no matter what the interest rate, that just doesn't make sense. You don't mention what your car loan interest rate is, though...

If it was me, I'd be looking at either a HELOC or just using the LOC that the bank has offered, and just get the bathroom done. Again, without any additional information, it's hard to try to give good advice. Like, how much is the bathroom that you're currently interested in renovating going to cost you. How much for the "other projects"? How much is the car loan? You say you put down $90k, but how much equity do you have in your house (mortgage needs to be less than 80% for the HELOC to work)?

C
[OP]
Newbie
Jul 17, 2016
66 posts
5 upvotes
Thanks for the advice so far.

So the car is on lease, 0% interest. Lease ends in October 2021. Purchase price will be about $10,000 next October, or about $14,000 if I buy it out now. My thinking for using leftover loan funds to buy the car now is that our added loan payment will effectively replace our monthly car payments and our monthly spending won't really change. I guess it is a way to buy out the car but not take any hit in my savings, but I see the point of it not making sense to essentially add a car to 25 year amortization.

We bought the house for $430,000 and took possession on October 30, 2019. $87,500 was down payment to be exact. Already one year later houses on our street are selling for $500,000 and they aren't any nicer than ours. We are expecting to spend $18-25K on the new bathroom as they are creating it from nothing in our unfinished laundry room. We know it will make it more enjoyable for us living here now as we only have a very small bathroom upstairs and it sucks having to tip toe around to try and not wake the baby, plus the added value should we sell the house.

For sure it would be nice to re-do some of the flooring and kitchen as well, but it would be crazy to take out even more money for that, no?
Deal Guru
User avatar
Mar 23, 2008
11502 posts
7790 upvotes
Edmonton
holden57 wrote: Thanks for the advice so far.

So the car is on lease, 0% interest. Lease ends in October 2021. Purchase price will be about $10,000 next October, or about $14,000 if I buy it out now. My thinking for using leftover loan funds to buy the car now is that our added loan payment will effectively replace our monthly car payments and our monthly spending won't really change. I guess it is a way to buy out the car but not take any hit in my savings, but I see the point of it not making sense to essentially add a car to 25 year amortization.

We bought the house for $430,000 and took possession on October 30, 2019. $87,500 was down payment to be exact. Already one year later houses on our street are selling for $500,000 and they aren't any nicer than ours. We are expecting to spend $18-25K on the new bathroom as they are creating it from nothing in our unfinished laundry room. We know it will make it more enjoyable for us living here now as we only have a very small bathroom upstairs and it sucks having to tip toe around to try and not wake the baby, plus the added value should we sell the house.

For sure it would be nice to re-do some of the flooring and kitchen as well, but it would be crazy to take out even more money for that, no?
Paying off a 0% lease with a 2.x% mortgage doesn't make any sense, no.

Based on what you say (and you didn't say how much your current mortgage amount is, so we're still guessing), $430,000 - 87500 = $342,500 mortgage. If the current value of your home is $500,000, then you currently have a LTV of 68.5%, which means your lender might be able to do a HELOC for ~$60k. The nice thing about a HELOC as opposed to just refinancing is that as you pay down your HELOC, you can draw on it as needed. So say you decide to do the new bathroom now using the HELOC funds, then you can pay down the HELOC for the next year, and then use that amount again for the flooring or kitchen. If it's just a refinance of the mortgage, once it's tacked on, it's done. And paying another $950 in a year or two to refinance again will get old (and expensive).

HELOC's can, however, be dangerous in the wrong hands. For people who aren't good with managing credit, it's like a big credit card, which never gets paid down. You just keep paying interest on it forever. But since you don't have any other debts, it doesn't sound like this is your situation.

As far as "crazy to take out even more money" to do the flooring and kitchen, that's a personal decision based on your budget and your priorities. Some people would rather have the renovation pain done with now (especially with kids), and get on with their lives. But doing it now isn't likely to save you much money now or in the future, so... Something only you can decide.

C
[OP]
Newbie
Jul 17, 2016
66 posts
5 upvotes
CNeufeld wrote: Paying off a 0% lease with a 2.x% mortgage doesn't make any sense, no.

Based on what you say (and you didn't say how much your current mortgage amount is, so we're still guessing), $430,000 - 87500 = $342,500 mortgage. If the current value of your home is $500,000, then you currently have a LTV of 68.5%, which means your lender might be able to do a HELOC for ~$60k. The nice thing about a HELOC as opposed to just refinancing is that as you pay down your HELOC, you can draw on it as needed. So say you decide to do the new bathroom now using the HELOC funds, then you can pay down the HELOC for the next year, and then use that amount again for the flooring or kitchen. If it's just a refinance of the mortgage, once it's tacked on, it's done. And paying another $950 in a year or two to refinance again will get old (and expensive).

HELOC's can, however, be dangerous in the wrong hands. For people who aren't good with managing credit, it's like a big credit card, which never gets paid down. You just keep paying interest on it forever. But since you don't have any other debts, it doesn't sound like this is your situation.

As far as "crazy to take out even more money" to do the flooring and kitchen, that's a personal decision based on your budget and your priorities. Some people would rather have the renovation pain done with now (especially with kids), and get on with their lives. But doing it now isn't likely to save you much money now or in the future, so... Something only you can decide.

C
Thanks for that advice. HELOC is definitely something I will inquire about with the bank. I wonder why it was never mentioned to us as an option? Will the HELOC interest rate be in line/similar with our mortgage rate or are we looking at 7% like a personal line of credit? As I'm sure you can all tell, I am very limited in my financial literacy, however I am very good/restrained with money so HELOC would not be "dangerous" for us.
Jr. Member
User avatar
Jun 7, 2008
148 posts
50 upvotes
Oakville
holden57 wrote: Thanks for that advice. HELOC is definitely something I will inquire about with the bank. I wonder why it was never mentioned to us as an option? Will the HELOC interest rate be in line/similar with our mortgage rate or are we looking at 7% like a personal line of credit? As I'm sure you can all tell, I am very limited in my financial literacy, however I am very good/restrained with money so HELOC would not be "dangerous" for us.
You've received some great feedback so far but your next step is to reach out to a mortgage broker. With how little you know this will greatly help identify what options you have available. If you do not have a mortgage broker, check out the mortgage rates thread as there are some great ones who can help guide you.
Deal Guru
User avatar
Mar 23, 2008
11502 posts
7790 upvotes
Edmonton
holden57 wrote: Thanks for that advice. HELOC is definitely something I will inquire about with the bank. I wonder why it was never mentioned to us as an option? Will the HELOC interest rate be in line/similar with our mortgage rate or are we looking at 7% like a personal line of credit? As I'm sure you can all tell, I am very limited in my financial literacy, however I am very good/restrained with money so HELOC would not be "dangerous" for us.
Not all lenders offer HELOC's, but it won't hurt to ask. Interest rates are typically slightly more than a mortgage rate, but considerably less than an unsecured LOC.

C
Deal Expert
May 30, 2005
44554 posts
5120 upvotes
Richmond Hill
Agreed that a HELOC is the way to go if you have enough equity. Despite what you may think about the security of your job, 20K can go by very quickly and so it makes more sense to have a HELOC so that you have 60K+ at your disposal and not just a mere 30-40K for doing all this extra paperwork and paying the $950 fee to do so.

And yes, please don't pay off a 0% car loan with anything higher than that.
Artisan woodworker crafting live edge tables, end grain cutting boards, and other home decor
Silver Coins | Philips Wake-Up Light with Radio | Heatware
[OP]
Newbie
Jul 17, 2016
66 posts
5 upvotes
So talked to lender. They suggested we stick with the mortgage refinance and just take the estimated $25,000 for the bathroom at about 2.10% and then we can open a HELOC, which is currently at about 2.95%, to have available if/when needed.

My math seems to tell me that taking this loan at higher interest rate HELOC is better option if I am going to pay it all off in next 3-5 years, where as if this is something I don't think we can pay off for 5-10 years I am better off taking it as refinance, even with the $950 lawyer fee.

Again, I want to thank everyone for their advice. Please keep it coming if I seem to be missing something.
Deal Fanatic
User avatar
Nov 24, 2012
5650 posts
1823 upvotes
Space
Dump the cash into the highest interest incurring balance. No point in having a emergency fund, use a LOC as an emergency fund.

Top