Room addition may benefit you more than moving
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
Having the third most expensive median selling price for single-family homes in America (according to the National Association of Realtors), many would be Orange County move-up buyers are stuck in an affordability or quality of life chasm.
They can’t income qualify for the bigger, better home. Or, if they do qualify, they have no money for life’s simple pleasures.
How about adding square footage and remodeling your home as an affordable alternative that won’t break your mental or monetary bank account?
Room additions cost about $200 per square foot for Orange County tract homes or much more on a custom home, according to Yorba Linda-based appraiser Myles Lawson.
Conceivably, you’ve gained some real equity in the process.
The cheapest way to finance your improvements is a cash-out refinance on your first mortgage based upon your existing property value. You can typically get up to 75 percent cash-out in a conventional loan or 85 percent cash-out on an Federal Housing Administration loan.
You can easily get a no-cost loan for a slightly higher interest rate.
If you have substantial equity, you can get a home equity line of credit and pull money out as you need to pay your contractor.
Or you can get a construction loan offering financing for up to 80 percent of the completed value after construction. Construction loans typically come with upfront points and an administrative fee called a fund control for the incremental payments to the contractor.
FHA has a loan called a 203(k) that allows you to finance up to 97.75 percent of the completed value. There are typically some costs to this loan, which are usually less than a construction loan.
Tim and Patty Farmer are homeowners in Mission Viejo. They were looking around with their daughter and son-in-law who were living in an expensive, one-bedroom apartment to either buy a larger home that they can all share or add two bedrooms (one for the kids and one for some future grandchildren) in addition to updating their kitchen.
“We’ve been here 37 years. We like the location and our neighbors. There wasn’t enough upside to purchasing a larger home,” said Patty.
Another benefit of staying, said Tim, is their low property taxes at around $1,700 per year. If they sell and move up in price, they can’t take their low tax bill with them.
Jeff Lazerson - Mortgage Columnist since 2011