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Advice on mortgage or HELOC to remodel home

Mark Cappel
UpdatedNov 19, 2007

Our plan is to convert our garage into a bedroom my 82 year old mother in law. What is the best type of loan for her?

Our plan is to convert our attached 2 car garage into a bedroom suite for my 82 year old mother in law. She is going to finance the project in exchange for living there the rest of her life life for free. She owns her current home outright and would pay back whatever loan she gets with the sale of the property after remodel is complete. She will also need money to update her residence in order to sell. My question is.. what is the best type of loan for her to get? Straight equity? line of credit? ARM? fixed? How would you do it if it were your mother-in-law? Thank-you for your time.

Since your mother-in-law owns her home outright, I would recommend that she take out new mortgage for whatever amount she thinks she needs for the remodeling of your garage and the repairs and updates to her home needed before its sale. A standard, fixed rate mortgage will likely have the fewest restrictions and allow the most flexibility for your mother-in-law when it comes time to pay off the mortgage. Frequently, ARMs and HELOCs carry pre-payment penalties that could cost your mother-in-law a lot of additional money when she sells her home and pays off the loan. While standard mortgages can contain pre-payment penalties, they are far less common in conventional, fixed rate mortgage loans than in HELOCs and ARMs.

While a HELOC would provide your mother-in-law with flexibility in how much she decides to borrow, many HELOCs impose prepayment penalties and other restrictions. If you and she have a relatively firm idea of how much the two projects will cost, I encourage you to take out a standard mortgage. Conventional mortgages generally provide lower interest rates and fewer restrictions than HELOCs. However, if you are unsure of what the remodeling and upgrades to the two properties will cost, the flexibility of a HELOC, even with a prepayment penalty, may be a wise choice. If you can obtain a rough estimate of how much money you will need, it would probably be better to simply take out that amount, plus a few thousand dollar cushion, rather than taking out a HELOC. However, if you are very uncertain of what the final cost of these projects will be, a HELOC may provide your mother-in-law with the flexibility to borrow as little or as much as she needs, up to the maximum limit set by the lender. If your mother-in-law decides to go with a HELOC, she can expect the note to include a prepayment penalty if she pays off and closes the line of credit before the repayment period defined by the loan expires. On average, she can expect to pay a prepayment penalty of between $500 and $1000, but the amount will vary with the amount of the equity line.

Regardless of whether your mother-in-law chooses a conventional mortgage or a home equity line of credit, it is imperative that she shop around with several different lenders and brokers to find the best deal possible. By speaking with different lenders, she will be able to compare the interest rates and loan terms being offered to determine which type of loan, and with lender, will best suit her needs. If your mother-in-law submits her contact information in the Mortgage Savings Center, we can have several pre-screened lenders contact her to discuss her options. offers a wealth of information about both home equity lines of credit as well as conventional mortgage loans. Explore to educate yourself about the loan options available to you and your mother-in-law.

I wish your mother-in-law the best of luck in obtaining a loan that allows her to meet her goals, and hope that the information I have provided helps you Find. Learn. Save.




jjeff, Jan, 2011
Consumers often refinance in order to consolidate and reduce interest rates on outstanding debts, make large purchases, finance college educations, start businesses or simply access cash for emergency purposes.