My wife and I bought our house 4 years ago for $115,000. We would like to add on to the bedroom and bathroom and pay off her student loan (which is about $10,000). Our current interest rate is 6.25 and our payment is about $1,000 per month. I'd guess the value of the house now to be around $120,000 (as houses near us are selling over that price). I believe her current student loan payment is about $250.00 per month. Would we want to get a Home Equity Line Of Credit to secure the funds to do the home improvement and pay off the student loan? Thanks for any advice you can give us.
Your ability to borrow against the equity in your home will depend on the amount of equity you have, your ability to make payments on a new loan, and your current credit score.
I recommend that you shop around for a mortgage, so you can see what kind of loan you qualify for and which loan best helps you accomplish your goals. Rates are so low right now that it may make sense to refinance your first mortgage loan and consolidate your debt.
Based on the information about your current loan provided in your question, it sounds like you have a 15 year mortgage, and I estimate that should have a remaining balance of about $95,000. If my estimate is accurate, you have about $25,000 in equity to borrow against, based on the original value of your home.
One key factor in qualifying for a loan and also determining how much you can borrow is the value of your home. The maximum amount of the loan is usually expressed as a ratio of your home’s value compared to the total amount you will owe on the home after the new loan, including all mortgages and home equity loans. For example, if your home is worth $100,000, and you own $90,000 total on the home, your loan-to-value ratio (LTV), would be 90%. The LTV restrictions apply, whether you are using your home equity to refinance your first mortgage or if you take out a second mortgage home equity loan or a home equity line of credit (HELOC). If you have two mortgages, lenders will look at the combined loan-to-value (CLTV).
Due to tightened lending requirements, most lenders will not go above 90% LTV on a rate and term refinance and 80-85% on a cash-out refinance, depending on your state of residence. You likely will be restricted to a CLTV of 85% if you take out a second or a HELOC.
Since I do not know how much your home is worth in today's market, I can't say whether or not you have sufficient equity to qualify for a cash-out refinance or a home equity loan. So, a good first step is to determine what your home is worth today. You can use tools online or perhaps speak with the real estate agent you used to buy your home. I don't recommend paying for a professional appraisal unless you feel that the appraiser will come back with the value you need to qualify for a loan.
Depending on how your wife's loans are structured and whether or not she has consolidated them in the past, you may be able to save money by consolidating her student loans. This could lower your monthly payment and also save you money over the course of the loan. You can apply to get matched for a student loan consolidation.
The terms on student loans tend to be more flexible than other loans, offering deferments, low-interest consolidation, etc. Also, paying off the student loan debts with an equity loan will convert unsecured student loans into debt secured by your home, placing your home at risk of foreclosure if you are ever unable to make your monthly payments on the home equity loan.
If you can't borrow enough to meet both the goals you have, to pay off the student loan and to pay for some home improvements, student loan consolidation may allow you to address both issues. You could use the equity to pay for the improvements and use the student loan consolidation to pay that debt more effectively.
The key to finding the best home equity loan available to you is to shop around to as many lenders to find out what terms each lender can offer you based on your credit score and other factors.
I hope this information helps you Find. Learn & Save.