Refinancing Questions

Jeff has a 4.5% mortgage through his in-laws. The bank will offer 3.25% on a 15-year mortgage. Should he refinance, and what is Dave's formula for paying for improvements to the house?

QUESTION: Jeff in Kentucky has a 4.5% mortgage through his in-laws. The bank will offer 3.25% on a 15-year mortgage, and he thinks it’s time to end the in-law deal. Also, he and his wife want to make some improvements on the house. Should he refinance, and what is Dave’s formula for paying for improvements to the house?

ANSWER: I would refinance and pay off your in-laws.

As far as improvements go, I’ve got two rules. The first is that you pay cash for improvements, and you don’t want to over-improve the neighborhood. After you’ve fixed up the house or added a room, if you’ve overbuilt, then you’ll probably limit your ability to get that money back out with what you’ve spent. You might be better off to move if that’s the case.

If the house is worth $280,000, and you want to spend $40,000 or $50,000 to renovate, that would be about $320,000 or $330,000. If the other houses on your block are $250,000, you should be prepared to live that money out, because it’s not going to increase the value of your house by the amount that you spend.

That’s a reason to rethink renovations, but I would not borrow the money in the refinance to do that. I’d use cash. I would refinance and pay off the relatives.