You may have cash in hand, or you may be going to your local lender, but in either case, it's wise to know some options for how one can come to own his or her own BrightBuilt Home In-Law Flat and Guesthouse. We’ve been talking to local banks, and have honed in on 3 of the most straightforward ways to add this tidy little living space to your property.
1. Home Equity Loan, a.k.a. Second Mortgage
Given that interest rates are on the rise, your best option might be to apply for a stand-alone second mortgage – or Home Equity Loan. This is a good choice when you have built up equity in your property. A Home Equity Loan is a mortgage for a smaller loan amount that is separate from your existing mortgage. The term over which it can be paid back will vary according to lenders, who will typically ask for 30% down. A second mortgage is a great option when your current mortgage has a low fixed interest rate that is better than the interest rates currently available in the marketplace (and you therefore do not want to refinance that current mortgage and lose that great rate!).
If you are interested in this path, it will be important to bear a few things in mind. First, your new in-law flat will need to be appraised, as the finished value of the improved property will have bearing on how much you can borrow. BrightBuilt Home can help here by providing documentation as to the added value of our high performance construction, but plan to allow time for the appraisal to be completed.
Also, banks can’t sell second mortgages in the open marketplace and as a result larger, national banks may be less apt to write second mortgages. If you approach smaller, local banks that have a residential lending department, you will likely have an easier time.
Finally, if you do not yet have substantial equity built up in your current home, and you will be renting the In-Law Flat to a friend or family member who you can depend on for rental income, you may be able to bring them in as a co-borrower in order to enhance your lender-qualifying profile.
2. First Mortgage Cash-Out Refinance
Another possibility you can explore is a Cash-Out Refinance on your first mortgage. The bank refinances the mortgage you already have with them, which frees up a lump sum of cash that amounts to the difference between what you owe on the original mortgage and the full value of your home. For example, if your lender will allow a cash out refinance of up to 80% of your home’s value, and your home is valued at $400k, you will be able to refinance the mortgage for $320k. If you still owe $200k on the mortgage, there will be $120k available in cash with which you can improve your property. This is a viable option for many homeowners, and in many cases can be easier to get because you are drawing on the value of what you already own.
If you opt to go this route, be mindful of the current interest rates. If rates are higher that what you’re currently paying on your mortgage, you may find that refinancing your property will render a higher overall monthly payment than you would have had if you’d kept your original mortgage and taken out a second mortgage for the in-law flat alone (see above). Whether this is the case will depend on the terms of your particular mortgage, but this is worth keeping in mind.
The third option is also the simplest. Cash will not require appraisals, credit checks, or lending paperwork. You may be able to pull cash from retirement or investment accounts, and unless you are withdrawing from an IRA or 401k, there are no additional costs to using this money for your project.
No matter your situation, we recommend talking to at least a couple lenders about the project you’re planning. Different banks will offer different arrangements and interest rates, and it’s worth shopping around to see what’s available.
If you are wondering whether an In-Law Flat is a feasible option for your property or you want to know more about the process of purchasing one, please don’t hesitate to give us a call!