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Pay down existing mortgage or save up for big down payment?
Old 03-26-2010, 10:39 AM   #1
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Pay down existing mortgage or save up for big down payment?

Hey gang, I've run into a sort of financial crossroads, and need some advice. I've been thinking about having a new house built on my property, and having the old house torn down. The current house is just too old, too close to the road, and needs to much work to really make it worth saving, IMO. Years down the road, if I decide to sell, I'm sure whomever buys it will just tear down the existing house and garage, subdivide, and put up new houses. However, if I built a new house, my reasoning is that the land would still get subdivided, the garage would still probably get torn down, but the new house would probably get re-sold, just on a smaller parcel of land, so there would be some value there.

The problem right now, is that I probably wouldn't qualify for a mortgage to build a new house. I don't have a conventional mortgage right now, but rather an HELOC. And when rates dropped to 3.5% last year, I maxxed that sucker out and invested most of it. The investments are doing well, and I don't want to cash them in.

So right now, what I'm thinking about doing is cutting back on some of my monthly investing. I'll keep my 401k maxxed out, as well as my Roth, but cut back my after-tax investing. I figure I'll have $1000-1500 monthly to work with, and could either:
A) throw it at the mortgage to get it paid down faster
B) set it aside for a bigger down payment
C) do a little of both.

Any insight on to what would be the best way to go? As far as financial stats go, I did get the HELOC paid down to $160K, from its high of $175K. I estimate the new house could run as high as $200K. And there is no way in hell anyone's going to give me a $360,000 mortgage! Although ironically, the monthly payment on a $360K mortgage (local credit union is offering 4.38% for a 30 year fixed) would only be around $1800 per month, less than the $2000-2500 per month I plan on throwing at the current mortgage.

My first instinct is to try to pay the mortgage down, as it's not going to stay at 3.5% forever. Any thoughts?

Thanks!
-Andre
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Old 03-27-2010, 02:46 AM   #2
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I sounds like what you need is a construction loan. Have you looked into one of those?

Without going all Suze Orman on you. It sounds like you borrowed to make investments, and now want to borrow more to build a new house. Are you sure you don't want to take some profits and pay down debt.

I guess I'd favor B since your current interest rate is only 3.5%.
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Old 03-30-2010, 08:11 AM   #3
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I haven't looked into a construction loan. I've heard about them, but don't really know how they work. I haven't talked to any lenders yet...figured I'd get opinions on this board first.

Just out of curiosity, what WOULD Suze Orman say about my predicament? I don't know much about her, although I've heard mixed things...good and bad advice. I guess that's true with most financial "gurus", though?

At this point, I'm starting to have a change of heart about doing anything, though. Right now, I actually feel somewhat free. My three biggest monthly outlays are for my 401k, my current mortgage, and my roth IRA. I max out the 401k, but since it comes out of my salary before I even see the paycheck, I really don't notice it. And at my current interest rate, the minimum payment on my HELOC is under $500. I always make more than the minimum, but it's nice to know that I have some wiggle room there if I need it.

If I go out and get this new house built, and take on a bunch of new debt, I might end up feeling trapped by it. And I'm sure it'll push my ER fantasy back a few years. I turn 40 this Friday, and my ER goal is April 2, 2016, my 46th birthday. Of course, I'll adjust that as needed and won't cry too much if I miss it!
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Old 03-30-2010, 08:29 AM   #4
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I haven't looked into a construction loan. I've heard about them, but don't really know how they work.
We built our current (retirement) home with a construction loan, on a new (not a tear-down) piece of land.

We sold our previous home and put the proceeds into a "draw account" with the S&L that was going to hold the note on our new home. They had the requirement to see the home plans (their people set a "completed value" on the unbuilt home, using the plans) to insure that the value at the end of the process would make sense and meet their requirement at the time for the anticipated future note/mortgage (e.g. 20% down).

While the home was being built, there were five "draws" approved. The first to buy the property (the builder owned the lot), the second draw after framing (roof on, windows in) and the additional three as the work commenced.

At the time that the draw account was exhausted (right before the 3rd draw), any further draws would be handled by a "bridge loan". We paid only the interest (month by month) until the house was completed.

At completion, the amount of the remaining draws was transferred to a traditional 30-year note (BTW, we paid off in 5.5 years ).

One thing you have to remember is that most lenders will not give you much $$$ on just raw land (or a tear down, I would assume). You need to have a bit more equity to cover the time it remains raw land until it becomes "property with improvements" (as my deed says, e.g. the home is on it).

Remember, a "mortgage" represents equity in land/improvements (e.g. house) that is used for collateral for a loan (note). If you don't have at least some skin in the game (e.g. a draw account), it's going to be difficult IMHO to get any loan organization to front you a lot of $$$

Anyway, that's how it worked with our construction loan, in our situation.
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Old 03-30-2010, 08:30 AM   #5
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You probably have already the millions of threads here about paying off the mortgage but your situation seems unique. If you paid off or paid down the HELOC to a certain level would you then qualify for the loan you would need to build the new house?

Suze Orman would tell you to pay off the HELOC and then keep saving your money and don't build another house (I'm just channeling her there--I have no idea what she would say! )
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Old 03-30-2010, 08:50 AM   #6
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Suze Orman would tell you to pay off the HELOC and then keep saving your money and don't build another house (I'm just channeling her there--I have no idea what she would say! )
I'm not Suze , but I agree with your comment...
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Old 04-15-2010, 12:05 PM   #7
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Hey gang, I figured I'd give y'all an update on my situation. I looked into building permits and such, and just for the water/sewer part of it, I was looking at around $15K just for the permitting! So, for the time being at least, I'm getting cold feet about building a new house. I just know that it's going to cost a lot more than I think it does, and I'm starting to go through a debt-adverse mindset right now.

On a brighter note, since I started getting gung-ho about building a house (the thought first crossed my mind back in mid-February, even though I didn't start this thread until 3/28), I did get the mortgage chopped down from $175K to $160K, and my portfolio total has shot up by around $35K.

So, if nothing else, I'm about $52K ahead of where I was two months ago.
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Old 04-15-2010, 04:32 PM   #8
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Permit are expensive and time consuming, which is the extent of my knowledge about them, .

I HELCO is fine for the time being, but generally speaking a conventional loan is cheaper. So you probably should keep on eye on getting one eventually.
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Old 04-15-2010, 11:20 PM   #9
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Have you done the math on your HELOC, to see what would happen to your payment if the interest rate went up to 5%, 10%, 12%? It might be illuminating to run a spreadsheet and see what's going to happen to your cash flow when the interest rates rise, which they will probably do at some point (OK, they could stay low for a long time, but I'm not sure that's something I'd bet the house on).

If you do decide to build a new house, don't tear down the old one. Fix it up enough with basic fixes to make it rentable, and use it for rental income. Friends of ours did this with their house, and now have two houses, the main one essentially paid for with rental income from the second, and now that the main house is paid off, are putting the rent from the second one into fixing it up more (which equals higher rent) and investments.

It's been very good for them.
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Old 04-16-2010, 07:45 AM   #10
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Have you done the math on your HELOC, to see what would happen to your payment if the interest rate went up to 5%, 10%, 12%?

Yeah, I've run the numbers, and they can get kinda scary! FWIW, the highest my rate ever went was to 8.5%, back in late 2006 and most of 2007. And when it did, I started paying that sucker down. But, in late 2006 and most of 2007, I was also making a lot of money, so that interest rate really didn't bother me...too much!

If it went back to 8.5%, with the $160K balance it currently has, I'd have to cough up $1230 per month if I wanted to pay it off in 30 years. At 12%, that would jump to $1645. And at that point, you can bet I'd be cashing in some investments to pay it down or, hopefully, I would have had the foresight to refinance to a conventional mortgage before it got that bad!
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Old 04-29-2010, 09:17 AM   #11
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I just (3/30 closing date) refi'd into a 5/1 arm at 3.625%, with a max of 8.625%, 75% LTV (max 2% resets after the first 5 years), no escrows. Title insurance porked up the closing costs a bit, but that is unavoidable. In the end it was a bit over $2K for a 300K loan if you exclude the property insurance I would have paid anyways (with my current provider). I'd investigate locking in the rates for a while unless you are willing to liquidate the investments.
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Old 04-29-2010, 09:40 AM   #12
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I have yet to meet ONE person who REGRETS paying off their house and any HELOC associated with it...........
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Old 04-29-2010, 10:24 AM   #13
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I just (3/30 closing date) refi'd into a 5/1 arm at 3.625%, with a max of 8.625%, 75% LTV (max 2% resets after the first 5 years), no escrows. Title insurance porked up the closing costs a bit, but that is unavoidable. In the end it was a bit over $2K for a 300K loan if you exclude the property insurance I would have paid anyways (with my current provider). I'd investigate locking in the rates for a while unless you are willing to liquidate the investments.
Who is the lender?
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Old 04-29-2010, 11:05 AM   #14
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Who is the lender?
My checking account is firstib.com. I put them up against another broker, and they came in better by 1/4 point, and slightly lower closing costs. They immediately resold the note to Fannie Mae, and sold the servicing to GMAC. I was kind of hoping they'd keep the servicing since my account was there and I'd presumably be able to make easy principal payments. They initially gave me heart ache since my house is in a revocable trust. They told me they wanted me to quitclaim it to my name, then put it back in. I didn't want that hassle and pushed back. Their attorney looked at my trust and we were back in business.

I had a 15 year fixed previously, and prefer fixed, but the rate was too low to resist, and I wanted to tap my equity for a home improvement project. I have stock that vests over the next five years that should kill the beast. I was relo'd here for work and there are no other employers of scale here, so if I lose/leave the job I am selling the house.
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