This is a guest post from JerichoHill.
Last week I introduced the first of a three-part series on my experiences with building a major home addition. It dealt with defining your objectives and determining if the necessary resources were available and where they were located.
To Recap: Because my fiancée, Julie, bought before housing prices rapidly appreciated, we had a large amount of equity to fund our addition, so we wanted to use a home equity loan product. We leveraged our strength towards its best use. Your financial picture will be different, but the key tenet is to utilize your unique strengths.
I next had to navigate the mine-ridden battlefield of loan applications. What was the best deal? How do I find it? And how would I know when I did find it?
We checked with our respective banks, thinking that our existing relationships with these behemoths (Julie and I had separate accounts in separate banks) would mean better terms. These two big banks had similar offers carrying a fixed rate of 8%. Not knowing if these were good or bad, it was time to utilize the magic of the internet.
I wanted lots of offers to compare to, and I wanted them quickly. Two popular websites for mortgage loan offers are BankRate and LendingTree. I filled out their forms and directed the offers to my spam email address, though regrettably, the phone number we used was Julie’s actual home phone number. In between the hundreds of highly annoying automated phone calls seemingly from LendingTree companies, we received about 10 different estimates on rates and funding in our email inbox.
Our national banks were dead last.
I believe my grandfather once told me to buy local and finance local. Hesitant to deal with lenders over the internet, and disappointed in our national banks, I turned to the local banks. Small local banks, the theory goes, know the area they are lending in. Local banks tend to only write loans in their geographic area. They may have more favorable terms since they lack the resources to compete on location and convenience against bigger banks. In my case, this adage turned out to be correct. After doing due diligence by stopping by various bank branches and getting rate quotes, I was up to 15 different offers.
It did not take long to wean through the offers, and after a few days, I applied for a Home Equity Loan with Cardinal Bank . With the small banks I talked to, I received better answers to my questions and more personal service than I had with the larger institutions. Since home-buying involves a large sum of money and a lot of trust, I placed a good deal of value on customer service. The smaller banks tend to be more willing to hold your hand and respond to your questions more than the bigger outfits, at least in my experience. Check out your local bank to see if this idea works for you.
Prior to signing the loan documents, Julie and I sat down to look at our financial picture with the new mortgage payment. Our new combined payment was essentially double what Julie had been paying previously on her first position mortgage. I wanted to sit down and look at finances because I had been used to living with roommates and paying very little in rent. I knew that my spending patterns were about to change. I was used to a college lifestyle (cheap rent, eats, entertainment) and was about to “grow up.”
We talked about how much our combined emergency fund should be (we felt comfortable with one year’s worth of living expenses). The new mortgage payment would be 36% of our take-home pay, which was quite roomy. There’s even money left over in our budget to prepay, and that’s a good feeling.
Good planning on your addition may mean you can find a way that it can finance itself: we turned the basement into a one bedroom suite. Eventually, this space will either house visiting relatives or children, but for awhile, we’ll be able to rent it out, and we plan on using the proceeds for one purpose: prepay the home equity loan.
If everything works out, we will pay down the whole home equity loan within 6 years. But what are we doing with the addition, and how can our experiences in the building process help you save money have to wait until next week.
You can follow the whole home addition process, including pictures and summaries, in this GRS forum thread
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