How should we pay for our second floor on our house outside Boston?

September 26, 2019 7:14 AM

My wife and I are strongly considering adding a second floor to our home outside Boston (the growing 7 year old is starting to run out of room amongst other things). Ballpark seems to be between $100K-$200K (wide I know). We have about $100K-$200K in equity in the house (depending on who you believe). How should we finance this adventure? Snowflakey detail inside.

A few additional notes:

1) We still have about half our PMI
2) We are paying 3.9% 5ish years into a 30 year mortgage
3) We have basically no credit card debt, but large ($150K+) student loans
4) We have really good credit
5) One car loan for another 4 years and probably one more coming soon.
6) Decent amount in 401K and some savings (that I don't want to use).
7) 40ish age-wise

We have some flexibility in our finances, but probably not enough to just spin up a $200K construction loan. Do we add a second mortgage? Refi again and take some cash out? Haven't spoken to a mortgage broker or anyone yet because would rather not start with someone who is trying to sell me their solution as the best solution!

Not really looked into being talked out of this (in case that is what you would like to do). We are pretty safe financially - 15% a year into 401K, 5% into other investments, etc but don't want to stop contributing to pay this loan or cash out investments as my return is usually more than the rate of the loan would be.

Anonymous here just due to financial level of financial details and possible ability for folks to link to my username, identity theft, etc...

posted by anonymous to Work & Money (3 answers total)

Cash out refi would work beautifully for this if you can afford the new mortgage payment and can get a good APR. We did this last year, and were able to pay off a couple loans and finance a new kitchen/bathroom. The upgrades we did increased the value of the house so much that we ended up selling it for a ridiculous amount over what we would have otherwise, so it was a good investment. As long as your house is worth at least what your new mortgage would be, I think that's a good option. FWIW, our broker talked us through several different options so maybe try to find one that you feel like has your best interest in mind to go through a few scenarios.
posted by LKWorking at 7:35 AM on September 26, 2019

I would suggest giving a call to a local credit union, they tend to have less pressure to sell you something that's not in your best interests. The one I've had good luck with is DCU. I would suggest going into a branch instead of calling, though, there's less randomness that way.

However, my guess is you will be looking more into a second mortgage rather than home equity, especially if the loan falls on the higher side of the 100k-200k range. Home equity is typically better suited for a revolving line of credit, second mortgages give you more money up front which might be more appropriate if you're paying contractors, for example.
posted by jeremias at 7:42 AM on September 26, 2019 [1 favorite]

I'd recommend the cash out refi 2nd mortgage if you can swing it.

However, I would doubt you actually have $200k or even $100k in home equity if you are 5 years into your mortgage and have still have PMI, unless your home was multiple millions in the first place or you got a screaming good deal and already spent a boatload fixing it up. But then again you sound like the perfect customer for a 2nd mortgage and someone banks would be happy to lend money to so they may stretch a realistic appraisal to fit you in.
posted by The_Vegetables at 1:46 PM on September 26, 2019