Our house was destroyed by several falling trees during Hurricane Helene. The insurance company (Allstate) has declared it a total loss. We’re getting a check for around $315k, which is the policy limit, and it’s made out to both us and our mortgage company (Mr. Cooper). Our mortgage balance is about $240k, and our house was our first home, purchased in 2021 with a 3.25% interest rate.
The mortgage company says we have two options:
Pay off the mortgage, use the remaining money as a down payment, and start fresh with a new construction loan.
Let the mortgage company manage the funds and use them for a rebuild, keeping our existing mortgage and interest rate.
We’re not sure which is better. Option 1 seems simpler but might leave us with less money to work with. Option 2 is a bit unclear to us in terms of how it works. We’re overwhelmed and would appreciate any advice on what makes the most sense, especially considering today’s higher interest rates. Thanks for your thoughts!
@Zoran
Rebuilding gives you a chance to make the home exactly how you want it and more resilient this time around. Plus, you get the benefit of a lower tax base with a brand-new house.
@Zoran
Construction loans often have higher rates, like 7%, until they convert to a conventional mortgage, which might still be around 5.5%. Keep that in mind when deciding.
Ozzy said: @Zoran
Construction loans often have higher rates, like 7%, until they convert to a conventional mortgage, which might still be around 5.5%. Keep that in mind when deciding.
We went through this for a major addition. The loan converted to a mortgage after completion, but we didn’t have an existing mortgage, so our situation was a bit different.
If you want to stay and rebuild, option 2 seems like the most straightforward way to go. It lets you keep your lower mortgage rate, and the process for handling the rebuild through the mortgage company is pretty standard after an insured loss.
Here’s how it works: You’ll need to get quotes from contractors and submit them to the mortgage company for approval. They don’t micromanage the details, just check that it’s a reasonable replacement for your original house. Once approved, the mortgage company releases funds in phases during the rebuild (e.g., at the start, midway, and completion). It ensures the money is used for construction and not diverted elsewhere.
If the rebuild costs less than $315k, the leftover funds might go toward your mortgage balance or come back to you as a refund, but that depends on the specific terms. On the flip side, if the costs exceed $315k, you’d need to cover the extra out of pocket.
The only downside is navigating through these stages and dealing with potential delays or complications with your contractors. Hope this helps clarify!
Before you finalize any decision, get a couple of quotes from contractors to rebuild your home. It’s possible that the cost to rebuild is higher than the policy payout, especially given rising construction prices. You don’t want to be caught off guard if the actual rebuild costs exceed $315k.