Find out how high the rate rises and how it’s figured. And be sure to compare the total annual percentage rate (APR) and the closing costs separately. This differs from other mortgages, where costs, such as appraisal, origination, and title fees, are figured into a bottom-line APR for comparison.
FHA 203(k) Mortgages
These FHA-insured loans allow you to simultaneously refinance the first mortgage and combine it with the improvement costs into a new mortgage. Because your house is worth more, your equity and the amount you can borrow are both greater. And you can hire a contractor or do the work yourself.
The downside is that loan limits vary by county and tend to be relatively low. The usual term is 30 years.
Energy-efficient mortgages (EEMs). Suppose your home’s R-value is the envy of your block. An EEM from Fannie Mae or elsewhere could boost your debt-to-income ratio by up to 2 percent. Utility bills are lower in energy-efficient homes, so the homeowner can afford a bigger loan. EEMs have been used for new construction; lenders are now pushing them for existing homes. An EEM requires a determination that your house meets Fannie Mae’s stringent energy-efficiency standards.
B and C loans. What if you have less than A credit or don’t fit the usual employment or income mold? B and C loans are a fallback. While many banks offer them, so do credit unions, brokerage houses, and finance companies. You’ll also find lenders that push B and C loans for debt consolidation with enticing introductory rates. Beware, though: Total interest and fees tend to be high because of the lenders’ added risk. And since B and C loans lack consistent requirements and terms, comparing them is difficult.
Getting personal. Houses aren’t the only loan collateral. Stocks, bonds, certificates of deposit, a savings account, and even a pension or retirement account can also help you get a viable personal loan from many brokerages and banks. Although the interest isn’t tax-deductible, the rate can be low enough to make these loans enticing. You also save the usual title, appraisal, and other closing costs of a mortgage.
Which Lender for What?
For a home equity line of credit, the best place to start is your own bank or credit union. Both usually offer lower rates to depositors. Check other sources to be sure. If you get a second mortgage, refinance, or opt for an FHA 203(k) mortgage, you’re better off talking with a mortgage broker.
A broker has more loan sources to choose from. When looking for a broker, check with people you know, and check any references you get. Contractors are another source of financing, but be wary: It’s hard enough to choose a contractor and a loan when they’re separate. And be suspicious of contractors who emphasize the monthly payment instead of the total cost of the job.
A borrower’s bill of rights. Article Z of the federal Truth in Lending Act makes sizing up lenders and loans easier. It requires lenders to disclose interest rate, terms, costs, and variable-rate features in a total APR, a bottom line you can use to compare loans. Here are some other rights to remember:
- If a mortgage lender does not disclose the APR, any application fees must be refunded. You usually get these disclosures on a form with your loan application. If any terms change before closing, the lender must return all fees if the changes make you decide not to proceed.
- You have three days from the day of closing to cancel. Inform the lender in writing within that period and fees are refunded.