Renovation and Refinance

[Andrew Spinelli]

Hello BP!

This is my first time posting, but have been following BP for a couple years now after purchasing my first property in Graduate Hospital, Philadelphia in 2017.

In 2020 my wife and I rented out our place in Philly and moved to Haddonfield, NJ. We recently did a full kitchen reno, added a powder room and will be putting in a deck this spring on the NJ house.

After these upgrades are complete, it’s our goal to refinance our home at a higher appraised value and use those funds to invest in a multifamily property (still evaluating markets).

I have a good relationship with my lender so was planning on opening the conversation there, but does anyone have any tips, pitfalls, etc. when it comes to refinancing after making renovations?

My main questions are around understanding how appraisers may value the upgraded property, timeline of the refinance process, and any other considerations I may not be thinking of

Thanks in advance! Happy to be a part of the BP community!

Andrew

[Natalie Schanne]

@Andrew Spinelli - you shouldn’t have any problems with your (cash out?) refinance. After 6 months of owning your haddonfield property, they can use the new appraisal to loan you money, usually 80% of the property’s appraised value. It takes about 35-45 days to complete a refinance from the day you start. And you have to buy title insurance again (it’s possible if you use the same settlement company they can cut you a deal). Interest rates were lowest in Dec and seem to be ticking up with the government’s plans to print money so with a cash out refi you may find yourself being offered a rate that is MORE expensive than your current mortgage rate. I saw rates as low as 2.75% but was recently quoted 3.25% on a primary purchase 30 year fixed.

What you want to do is prepare a paper printout and excel doc list of recent renovations and approximate costs (you can inflate it a little or ballpark based on a professional if you got it on sale or DIY it) and provide it to the appraiser at the appointment. Also print off any mls or Zillow sold comps that would reflect your home being worth more than you paid because of the additions. Other X bed Y bath Z sqft homes have sold for $$$. Don't expect that every $$ you invested will come back 1:1. Sometimes pro bathroom renos might be valued at like $10,000 even though you paid $20,000. It all depends on the area, what you paid, and how generous the appraiser is feeling. My husband and I refinanced our home after renovations to go from a 5% down loan to a 80% LTV loan, no cash out, and payments dropped $500/mo because we went from 5% (2018 rehab loan) to 3.125% and we were able to remove $100/mo of PMI. Our home appraised for $100k more than we were into it for. Good luck to you!!!

[Andrew Spinelli]

@Natalie Schanne Thanks so much Natalie! This is super helpful. Glad the refi worked out for you guys - hoping to come out with a similar result as far as appraisal goes.

[Kevin Romines]

@Andrew Spinelli I would get a Loan Estimate from your favorite lender to analyze what the likely rate and payments would work out to be? If you are not happy with the payments due to rising interest rates, I would consider leaving your existing loan in place and just doing a HELOC to have access to the cash.

Once the HELOC is in place, you can use that money for whatever reason you might choose. Of course, compare the 2 loans and payments to make your best choice. Also, a cash out refinance can only go up to 80%, whereas a HELOC can go to 90-100%. so its a different animal, but you should be able to analyze the two different kinds of loans to determine the best route to go.

Also, the closing cost of a refinance, are much larger than the closing costs of a HELOC.

I hope this helps?

[Andrew Spinelli]

@Kevin Romines Great advice - thanks Kevin. We will definitely weigh the pros and cons of HELOC vs. cash out refi when opening the conversation with our lender.

For a HELOC, is there any scenario where we would be able to access a LOC against the higher appraised value? Or would it just be against the existing loan?

[Chris Teti]

Hi Andrew! I'm actually right down the street from you in Barrington NJ! Small world. I don't think you'll have any problem getting a loan or a HELOC as long as your credit is good. Which one will depend on how you want to use the $$. A loan will give you a better interest rate but even if you are not using the $$, you are paying interest and a monthly payment. A HELOC might have a slightly higher interest rate, but if you aren't using it, you aren't paying any interest. If you only need to use a part of it, you only pay interest on the amount you are actively borrowing. In my experience REFI"s tend to appraise a little lower than for sale appraisals.

Good luck whatever you decide. 

[Kevin Romines]

@Andrew Spinelli Yes, the lender will require a new appraisal. So the loan will be based on the new higher appraised value due to the rehab that you completed, so good news on that front. Just choose the loan that best suits your goals going forward and go from there.