Q: We have a construction loan with a credit union. The current market value of the house is twice what we owe. The credit union doesn’t require a current appraisal and wants to convert the construction loan to a permanent loan at 6.25 percent.

Can we renegotiate the amount of our permanent loan to an amount that is greater than what we owe on the loan and a lower interest rate? We have a current appraisal that shows our home is worth twice as much as what we owe.

How will this affect our credit since the credit union reported our construction loan to all three credit bureaus? Can we tell them that if they don’t give us a new loan for a higher amount than what they previously reported to the credit bureaus that we will walk away from their deal?

A: You shouldn’t mix the issue of obtaining financing and the issue of your credit history and credit score.

If your current lender is willing to convert the construction loan into a permanent loan, that’s great. But that doesn’t mean that you shouldn’t shop around. You should compare the interest rate and costs to convert the current loan to a new loan obtained with a different lender.

Are you still under construction? If your home is still under construction and your lender is willing to convert your loan to permanent financing without pulling another appraisal, that may be a good offer. A conventional lender might be hesitant to offer permanent financing on a house that’s under construction.

If you have completed construction, you can refinance with the current lender or use a different lender.

While the interest rate you are being offered by your current lender may be higher than other lenders, your upfront costs may be lower. You will need to balance the upfront costs with the interest rate to determine the deal that will be best for you.

Turning to your credit history, your current lender has reported your loan payments to the major credit reporting bureaus, and your new lender will probably do the same. If you’ve paid your construction loan payments on time, your credit shouldn’t suffer as a result of the construction loan. There are many factors that go into determining your credit score: the length of time you have had your loans, your ability to pay all of your bills on time, the amount of credit you have, the amount of credit you have taken out when compared to the total amount of credit available to you.

While you probably have not had the construction loan for a long time, if you’ve made your payments for this loan, and all of your other bills, on time, your credit score should be pretty high.

You can get a copy of your credit report for free from AnnualCreditReport.com, and you can purchase a copy of your credit score there as well for about $8. You may want to review one of your credit reports and a credit score to see where you stand.

If your credit is excellent, you may wish to explore taking out a new loan for a greater amount of money. Your credit score may adjust somewhat with a new, larger loan, but if you can afford it and get an interest rate that is closer to the market rate, it might be a good deal because it will give you the extra cash you’re looking for.

May 28, 2009