Mar. 13th, 2010

tnrkitect: (Default)
This is sort of a follow on post to the one from last week, but from a different view point, that of personal finance.

As you may recall, we are in the process of refinancing our house using an FHA 203(k) loan. This is commonly referred to as a "renovation mortgage". The way it works is simple. You finance (or refinance) a house, plus the additional money to renovate or add onto the house, so long as the the (re)financed loan plus the construction costs are less than the appraised value of the house after the construction is complete.

We will turn a 2 (technically 3) bedroom 1 bath one and a half story Victorian cottage into a 4 (technically 5) bedroom 2 bath house by finishing out the attic space into livable space. While doing so, we will also fix many of the problems that the house currently has, as well as improve upon its current condition.

We currently have about 7.5% equity in our house. After we do the renovations, we will have approximately 28% equity in our house, due to the cost of the renovations being less than the increase in value the renovations will bring.

Now, we have a higher mortgage payment (between $50-$100 more per month), but as you can see it will be more than worth it. Especially since we are seriously considering putting the house on the market after we get the renovations completed.

Why?

Why go through the effort and hassle of refinancing and living in a construction zone for 6 months only to sell it?

Easy. That 28% of equity after construction is complete translates into enough money after the sale to just about pay off all our debt. So, when we consider being debt-free and renting versus being in debt but in this house, we honestly would prefer to be debt-free.

Neither of us consider this house our "Dream Home", and although we like it a lot, we like the thought of being debt free better.

Debt free means less worry about finances, and frees up lots of options. Not to mention that it means we will be out of debt about 2 years sooner than we are currently budgeted for. :-)

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tnrkitect - Musings of an Unconventional Mind

June 2011

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