NEW YORK (CNN/Money) - I'm in the process of refinancing my house and also remodeling my kitchen, which I figure will cost me another $3,000 or so to finish. Do you think I'm better off asking for additional cash at closing to cover the kitchen costs or should I finance the kitchen on a separate home equity line of credit?
The mortgage I'm considering has a 5.75 percent rate and a 20-year term, while the home equity line rate is prime plus 4 percent. What should I do?
-- Mike Bocek, Mason, Michigan
Well, normally I'd say you're better off paying for the remodeling in cash if you can afford to do so. But I also believe we should all have a cash reserve for emergencies, especially in times like this when the job market is so soft and there's so much uncertainty. So I think you're making the right move to hold onto your cash for now and finance the remodeling.
As to the question of whether to add the kitchen costs to your first mortgage or finance the tab via a home equity line, I'd probably go with the first mortgage.
The reason is that you're going through the refi anyway, so why not just throw in a few thousand more bucks and take advantage of a nice low long-term rate. With a 20-year term and a 5.75 percent rate, the extra three grand is going to raise your monthly payment all of $21 a month or so, so in the grand scheme of things I doubt you'll notice it.
One question I do have, though, is whether you're getting the best rate you can on your home mortgage. Recently, the average for 30-year loans was in the neighborhood of 5.4 percent, so I would expect that a 20-year loan would have an even lower rate.
So before you sign the deal, I recommend you see whether other lenders in your area might offer a better deal. You can begin that search by checking out the mortgage loan screener at our Rate Search section. (There isn't a screen for 20-year loans, but the lenders who offer the best deals on 15- and 30-year loans are the place to start for the best rates on 20-year mortgages as well.)
One more thing: even if you don't need a home equity line for the kitchen job, I think now is a good time to consider taking out a home equity line of credit as a back-up in case you run through that cash reserve you talk about.
Home equity lines provide a good all-purpose cushion because you can draw on them by simply writing a check and they generally have very flexible repayment terms. But again, if you do sign up for a home equity line to use as a back-up of your back-up reserve, I suggest you check out other lenders.
The prime plus 4 percent rate your bank is offering is really out of line with the market for home equity lines. Many banks offer rates at prime plus 1 percent or prime, and some even go a bit below prime.
So after you're done checking out mortgage rates at our Rate Search section, just scroll a bit further down the page to the Home Equity line screener. I don't think you'll have any trouble finding a lender that beats that prime-plus-4 percent, and that waives closing costs to boot.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.
