This is a relatively new type of loan that allows you to remodel your home and refinance your mortgage at the same time. The benefit is that you get the best rate available for a standard refinance, and you get that same great rate for the construction work.

Typically, construction loans are shorter-term, covering just the construction period alone; they are adjustable mortgages as well, usually based on prime.

At the end of a construction period, that construction loan has to be replaced with a permanent, or regular mortgage. That’s when you would have to refinance the construction loan, along with the standard closing costs attached to the transaction. Adjustable-rate mortgages associated with the prime rate are typically higher than what you can get with a long-term fixed mortgage. If you’re thinking of refinancing, you may also want to consider remodeling or renovating your home at the best possible rates.

Let’s say your current rate is 7 percent, and you owe $200,000 on a 30-year mortgage. Your current value is $275,000, or a 72 loan-to-value ratio (LTV), and mortgage rates have dropped to 6.25 percent. You determine that it’s a good idea to refinance. But at the same time, what if you have also been thinking of adding on a bedroom and a bath? Typically, you would go to the bank and get a construction loan. But with the refinance / remodel loan, you can kill two birds with one stone.

To complete this type of loan you’ll need to get some hard numbers, such as the cost of materials, labor, permits, and all associated costs and fees. First, go to an architect and have her draw up a set of plans. Then take the plans to a builder and ask for a bid; bring your plans and specifications, along with the builder’s estimated cost to add on the additional room.

In this example, let’ say the additional room will cost an extra $75,000, so you will add in the construction costs with your current loan amount of $200,000, plus closing costs of $3,000, and your new loan balance will be:

$75,000 + $200,000 + $3,000 = $278,000

But wait! Isn’t your value only $275,000? Yes, and that gives you a 101 percent LTV! Refinance loans won’t let you go that high in terms of loan-to-value, right? With a remodel / refinance loan, there’s a twist: the value will be based on the addition’s already having been completed, not on the current valuation! That’s because the appraiser assigned to value the property will take your blueprints along with the cost estimate and physically visit your property. He’ll imagine your new bedroom and bath being complete and he’ll determine the value from that standpoint. So, if your home suddenly goes from a two-bedroom home to a three-bedroom home, then your new value could be $325,000, or an 85 percent LTV. That leaves enough room for a refinance with either mortgage insurance or two liens of $260,000 and $18,000.

There are two types of loans designed by Fannie Mae and Freddie Mac, by the way. Fannie Mae’s offering is called the Homestyle mortgage, and Freddie Mac’s version is the Renovation Plus loan. There are virtually no differences between the two. Not every lender offers these products; it may take a few phone calls to find one that does. But if you’re considering remodeling, you may want to find out if it makes sense to refinance as well. If rates are lower and your recovery period is within guideline, a remodel/refinance loan can’t be beat.