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Kind of a mid life crisis; need loan.
Old 12-16-2009, 10:53 AM   #1
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Kind of a mid life crisis; need loan.

Iíll try to keep it simple, but would like some advice.

8 months ago my wife got a promotion but had to move to a different city. She moved with our 12 year old in to an apartment. I stayed behind a few weeks to finish up the projects with work and to do a light remodel / update on the house (paid off in 2004).

We bought (cash) two ten acre adjoining lots that are lightly wooded near the city where my wife is working. After I got relocated I found a part time job and started working with a contractor to build the shell of our new house.

We used our savings and cashed in our fidelity fund and were about out of money. We were planning on our other house selling before we got to this point.

We need about $42,000 to finish construction and to get moved in. Early this week we went to 2 banks with the deed from the 10 acre (worth $60-65,000) lot next to our new house to get a $50,000 loan, but I feel that I was given bad info. We were told it would be better to use the house that is for sale, the house under construction, or to get it loaned out of our 401k.

Iím starting to think that itís our credit that we donít use. We both have $7,500 credit cards in our own names and every 2 years one of use trades in for a new car. In June both of out credit ratings were in the 730 to 760ís.

My wife (39) is an Emergency Coordinator, EMT-P, NP and makes $79,000. Her 401k had $98,000 last quarter.
Iím (40) an architect currently working 25 hours a week. I should be able to make $75-85,000 when Iím ready for a full time job. My 402k had $102,000 last quarter.


My thoughtsÖ
I have always been told not to take a loan form your 401k but donít know why itís a bad idea.

I would think it would be a pain to take a small loan out on a house thatís for sale and have that to deal with at selling.

If I took a loan out on the house that were building it would have to be a construction loan and would have to roll it over into a home loan once it was finished.

To me using the empty land thatís worth about $60,000 for a $50,000 loan makes since; but what do I know?
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Old 12-16-2009, 11:19 AM   #2
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Paying off a loan made on the new house would be easy enough. Seems like it would be a problem that you're not living there, have just changed addresses, and just changed jobs. None of that helps convince loan officers.

The construction loan is probably your most conventional option. You should be able to pay it off anytime your old house sells, or roll it into a conventional home loan if necessary. Using the lots makes sense, but you have to go with what you can get...

The 401k loan works as an emergency otpion if necessary. I've never done it, but I don't think a short-term loan would seriously derail your plans.
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Old 12-16-2009, 11:20 AM   #3
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Why not set up a home equity loan account on the house for sale.That would allow you to draw as you need it.

Unless you are a better architect than I have been around , the $42,000 will not be enough and it would be easier to get the extra when you need it.
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Old 12-16-2009, 11:37 AM   #4
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Your situation is a wee bit like mine when I moved from MD to VT 5 years ago. My goal was to sell my MD house before closing on the VT house and just pay cash for the VT house from the proceeds. As it turned out, I didn't sell the MD house in time but I didn't want to get a mortgage for a short period of time. So I gambled (and, fortunately) won.

- My wife and I liquidated most of our 401K/403B retirement plans.
- I borrowed against a few whole life policies.
- I redeemed mutual funds, especially those where I had only small CG's.

In short, I scraped up enough money to pay cash for the VT house. The risky move was to liquidate the retirement plans. BUT, in my research I learned that if you return the money to the plan (or to another qualified plan) within 60 days of withdrawal, it counts as a rollover and there are no tax implications. It worked for me with about 2 weeks to spare. But I had a plan "B" in case it didn't because I wasn't going to pay tax on all of that money, kick us into a higher tax bracket, etc. And the housing market in MD was a lot better back then.
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Old 12-16-2009, 11:44 AM   #5
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My quick thoughts on this is that the land is not worth what you paid for it.

Why not sell that land and use the money to pay for the house?
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Old 12-16-2009, 12:21 PM   #6
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Others may have more experience, but I've found lenders to regard lending on land as more speculative as compared to lending on a structure like a house, office building, shopping center, etc. I recall something like 50% Loan To Value ratios were what many lenders back in 2004 were looking for to lend on land. I assume banks now are at least that conservative. That "$60,000" parcel may appraise at $50,000 and get you a $25,000 loan at 50% LTV.

I second the comments that a home equity loan on your old house may be easiest/cheapest for short term funding needs. Or a construction loan should be easy too. Usually a percent or so higher during construction, and often variable rate, then you lock into a permanent rate when you close. The construction loan lets you draw as needed as your contractor requires progress payments. Unless you're acting as GC in which case it would just be you paying your "subs". Not sure if lenders like having borrowers act as GC or if that would be an issue, however being an architect (with experience dealing w/ construction??) would be a positive I would think if you can talk to a real person at a bank with authority and a brain atop their shoulders.
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Old 12-16-2009, 01:31 PM   #7
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I have always been told not to take a loan form your 401k but donít know why itís a bad idea.
You can google "401K loans pros and cons" for more details, but in a nutshell the loan amount is pulled from your investments. Getting out of the market and back in is very speculative (you could come out ahead but probably would not). This of course assumes you have a good portion of your 401K assets in equities. If you are a very conservative investor with the bulk of your assets in fixed income, then a 401K loan "might" be attractive (but then it might also be a good idea to change the topic to asset allocation )
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Old 12-16-2009, 02:21 PM   #8
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My guess is you'll pay a higher rate on a land-loan than you would on a HELOC on your for-sale house. Since the land is not your primary residence.

I'ld do the HELOC ... the loan would be paid off when it sells. Then you're free n'clear (again).
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Old 12-16-2009, 05:17 PM   #9
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My guess is you'll pay a higher rate on a land-loan than you would on a HELOC on your for-sale house. Since the land is not your primary residence.

I'ld do the HELOC ... the loan would be paid off when it sells. Then you're free n'clear (again).
X 2


Plus, as others have said, land is NOT a good asset for a bank... it has NO income potential... and does not sell well in a down market...
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Old 12-16-2009, 07:03 PM   #10
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I would go for a HELOC on the existing home. Better rates than a land loan, and you can reduce the interest expense if you only draw as you need it, rather than taking a lump sum up-front.
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Old 12-16-2009, 07:42 PM   #11
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Thank you Dave J ;-) I needed that.

Friar I could see how that could pay off but I don’t think that’s the option for us.

Now I see where my problem is FUEGO. I understood that the property that appraised for $63,000 and paid $61,000 would only have a true value of around $50,000. But I didn’t know they didn’t like to lend more then 50% of the value; but I see why once think about it.
I don’t know how they would distribute out the money with a construction loan being this far into it. It’s something that we’ll have to go back and talk to them about. The clay plaster goes up next week and then were broke. Tong and grove flooring is stacked and trapped thought the house. The base boards have to be custom milled (common knife set). There are a few other odds and ends.


Were off to see about loans in the morning again.
Thanks for the insight.
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Old 12-17-2009, 09:41 AM   #12
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So we went back to the larger national bank and we ended up with a different loan officer with was much more helpful.

She says they don’t like to lend more than $2,000 an acre unless there is a good credit rating behind it or it’s in a prime location where they think it will sell quickly.

We talked about the HELOC (thanks Westernskies) but with the house in a different state they could not write the policy; but a branch in that state would have to write it and they would help out so we would not have to travel.

We went with a $60,000 construction loan pending on the house inspection on Friday. It’s a 6 year loan with rollover at 4.79% APR. She gave us a lot of reading material to go over. We go back Monday morning another round of Q/A and to sign the paperwork.
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Old 12-17-2009, 09:46 AM   #13
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We went with a $60,000 construction loan pending on the house inspection on Friday. Itís a 6 year loan with rollover at 4.79% APR. She gave us a lot of reading material to go over. We go back Monday morning another round of Q/A and to sign the paperwork.
Sounds solid. Can you draw down on the $60,000 as you need to make progress payments? Or is it a lump sum you get day 1?
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Old 12-17-2009, 09:58 AM   #14
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I have to take $10,000 on day 1. They want one business day to transfer the money form the loan to our checking if it’s over $5,000.
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Old 12-17-2009, 09:59 AM   #15
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I have to take $10,000 on day 1. They want one business day to transfer the money form the loan to our checking if itís over $5,000.
That sounds like a good deal - after the 1st draw you can take what you need when you need it to pay your contractor. You save interest on the unneeded balance in the meantime.
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Old 12-23-2009, 10:15 AM   #16
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You can google "401K loans pros and cons" for more details, but in a nutshell the loan amount is pulled from your investments. Getting out of the market and back in is very speculative (you could come out ahead but probably would not). This of course assumes you have a good portion of your 401K assets in equities. If you are a very conservative investor with the bulk of your assets in fixed income, then a 401K loan "might" be attractive (but then it might also be a good idea to change the topic to asset allocation )
+1

The other issue is that if you have an outstanding loan, and you leave your employer, you have an issue. I'm not sure of the exact rules, but I think you either have to a) pay it back within x days or b) show it as regular income and pay associated taxes/penalties on it.

Dave
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Old 12-24-2009, 06:49 AM   #17
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+1

The other issue is that if you have an outstanding loan, and you leave your employer, you have an issue. I'm not sure of the exact rules, but I think you either have to a) pay it back within x days or b) show it as regular income and pay associated taxes/penalties on it.

Dave
Thatís something I did not find out about a 401k loan, but didnít research them. Itís defiantly some good info to keep in mind when I hear others talking about them.

I did go through with the construction loan on Monday.
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Old 12-25-2009, 09:18 AM   #18
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wow ... construction loan under 5% ... that's nice.
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Old 12-25-2009, 11:20 AM   #19
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wow ... construction loan under 5% ... that's nice.
I think it all depends on the details. I think there looking at it as being a $60,000 home loan on a $500,000 house that needs plaster floors, and wood work.
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