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Question for the Money Doctors

Question submitted on Oct 27, 2011.

Question

My question has to do with mortgages. My parents have one more payment left on their mortgage (finally!). They have some improvements that need to be made to the home (new furnace, some remodeling in the bathroom), and are wondering how to best finance that. Should they be refinancing their existing mortgage, getting a home equity line of credit or a different method altogether. They have a couple of CD''s in the bank that they have borrowed against in the past, and wondered if that would maybe be the way to go. Any suggestions you have would be greatly appreciated!

Answer

To give a definitive answer I would need more information.  However, based on the limited information, I would consider the following:

First, make the final payment on the mortgage.  Congratulations!  What a great accomplishment!

Second, I would establish a home equity line of credit (HELOC) to do the improvements as long as this amount is an amount that will likely be paid off within the next 2 or 3 years.  An easy thing to do would be to pay a monthly amount on your HELOC equal to the amount that you were paying on your mortgage.  Since you lived with that monthly payment for many years, you likely won't feel it if you continued to pay that amount.  Keep in mind that the HELOC will be a variable interest rate.  So, if rates rise so will your HELOC interest rate.  If it is going to take you awhile (closer to 10 years) to pay off the home improvements because the improvements are going to be significant, then consider a conventional mortgage that will lock in or fix your interest rate so that you don't get caught with a significant debt amount in an increasing interest rate environment.


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