Author Topic: how to handle construction loan + mortgage refi + car loan payoff  (Read 2492 times)

RecoveringGearhead

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I started a post in the DIY section about the issues with my house and the next step for me is to figure out how to pay for it.
http://forum.mrmoneymustache.com/do-it-yourself-forum!/looking-for-advice-on-sheetrock-damagemold-remediation/

Im still waiting to see what the insurance company is going to cover, but at this point Im assuming they will cover the damages.  The permanent fix will be on me.  And if Im going as far as has been recommended, then we are thinking about getting a construction loan and putting an addition on the house. 

Quick background on where I was last September.  (I DO expect a few face punches here)
- We have 25 years left on a 145k mortgage at 5.25% (We paid 165k for the house in 2010, had it appraised 2 years ago for around the same, Im assuming it still is)
- We owed around 12k in credit cards.
- We owed 12k on a clown car
- We lived pay check to pay check
- I sold my beloved '94 Honda Civic because it just started making less sense to put my 2 yr old int he back of a 2dr hatchback...and Im 6'6".  We bought a '05 Outback and owed around $8k on it.
- We got heavy into changing our spending habits and started throwing everything we could at the credit cards.
- I started driving the Nissan Xterra that my wife had been driving.  After realizing how bad the mpg really was (like...17mpg was a good tank of gas), I decided to trade it in.  I got hosed on negative equity and some repairs it needed.  Got a '08 Mazda3 and day one was way upside down.
- My christmas bonus went straight to credit cards.
- A large christmas gift from my grandmother went straight to the credit cards and....finally were credit card debt free.
- We did our taxes on 2/1, already got our federal return and most went straight towards the highest interest car payment.  Rest into savings.  Still waiting on State.
- 2 weeks ago I sold my race car for 14k.

Between the tax return and selling the car, we were set to pay off one car completely and within 2 months have the other paid off.  That is the only reason I was okay getting into the car loans as I knew Id be able to sell the race car before spring time.  I live in Maine where less than 5k gets you a rust bucket unless youre lucky.  My Honda was the best <5k car Ive ever seen.  The plan WAS to start splitting around 1k in surplus every month between Emergency Fund and 401k or mortgage (hadnt decided yet..).  But then the house issue happened and the smoldering hair fire was not put out. 

Current debt
- '05 Outback, $6200 @ 4.5%
- '08 Mazda3, $14500 @ 4%
- Mortgage, $145000 @ 5.25%

Once our state return comes in, we have roughly $4k in savings.  And I have $14k in my other account from the car sale.  We also have around 15k in credit limit available, some on 0% cards until next year. 


So...I have some decisions to make as far as how to go about spending the money the most efficiently to get rid of the car loans and get the construction loan going.  I do not have estimates and do not know how much insurance is going to cover.

My initial thought is to pay off the Outback just to get out of one of the payments.  Then put some of the money towards the Mazda.  If there is cash left over after getting through the house ordeal, we will put it straight towards the Mazda. 

What would you do?
« Last Edit: February 25, 2015, 02:14:45 PM by RecoveringGearhead »

justajane

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #1 on: February 25, 2015, 02:43:39 PM »
What's your age, income, and retirement numbers?

RecoveringGearhead

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #2 on: February 25, 2015, 03:15:14 PM »
34
$90,000 combined
401k is currently around $42,000 and to be honest haven't even gotten to point where I can put a date to retirement.  Id hope to be done by 50, maybe sooner and haven't even ran a calculator to see whats possible.  We've just been focusing on getting out of debt and optimizing our spending. 

justajane

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #3 on: February 25, 2015, 03:23:44 PM »
Thanks. Just checking. You're young, and while your retirement is low, you are still young enough to catch up. If you had said you were 50 and had very little retirement, I might have said to put at least half in your retirement. :)

But since you are still in your 30s and have a decent income, get rid of the smaller car loan. And throw a few thousand at the other. Put the rest in savings for an emergency. Given your history of credit card mismanagement, don't put anything on a card, even if it is 0%. It's too dangerous.

The interest on your mortgage is not great, but it's not terrible. Just keep paying as usual on that. Don't prepay. Do you have a serious option to refinance? If so, run the numbers first. How long to break even? How long do you plan to stay in the home?

It's hard for me to advise you on the house repairs, but you don't have enough money to put an addition on. Can I ask why you want to do this? What would you gain?

RecoveringGearhead

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #4 on: February 25, 2015, 03:42:16 PM »
You'd have to read the other thread to get the long version.  But in a nutshell I have serious insulation/ventilation design issues with the house and currently have water damage in the interior and mold in the attic. 

If all we do is use the insurance to fix the damage, Im selling it shortly after because the problem will return.  And if I do that, the house is permanently labeled with the previous issue that I have to disclose when selling and I haven't done anything to permanently fix it.   

Every contractor Ive talked to or had look at it is suggesting ripping all of the sheetrock down on 2 end walls to fix the problem.  This includes my entire kitchen, bathroom, and half the living room.  Sounds ridiculously expensive and Im not sure I want to go through that without making the outcome more appealing.  Id still have to disclose the previous issue, but at least something has been done to prevent it.  Id also be out a lot of cash. 

My thought was that we could kill 2 birds by taking half the problem (one of the walls needing to be gutted) and turn it into an addition project.  Id be looking at getting a construction loan that would be based on the final value of the house.


I know none of these options are ideal, but its the situation Im in.  March was supposed to be a lot brighter in terms of our financial situation. 

I was going to start paying extra on the mortgage to get it below 80% ltv and get rid of the PMI within a year.  So refinancing a construction loan into it doesn't sound horrible. 

justajane

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #5 on: February 25, 2015, 04:49:23 PM »
Ah, thanks. In that case, I would put the money from the sale of the sports car towards your project. Forget about the cars for now. The rates are not terrible on them. This is clearly a maintenance emergency. I still, however, question the addition project. Do you really want to sink any more money than is absolutely necessary into this home? You rarely, if ever, recoup the cost of an addition. We added a bedroom and a bath to the back of our home, and we probably only increased the value of our home by 20-30K. We paid 75K. I know markets are different, but there's no 100% return on such large projects if you hire them out. Put as much cash as you can into the project and finance/refi the rest. I am of the opinion that even large home projects should be paid with at least 50% cash. You never want to overextend yourself and end up underwater. 

RecoveringGearhead

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #6 on: February 26, 2015, 05:36:14 AM »
I appreciate the insight.  I dont a have a good idea of how much something like that will increase the value. 

I was so excited to finally put the fire out, that I really wanted to axe at least one of the loans.  But I do agree that I need as much cash on hand as possible right now. 

I cant picture completely disassembling my kitchen and bathroom and putting it back exactly how it is.  One option that I really hadnt been considering until now is to only gut the side that is currently having the issue and fix it permanently.  That side is opposite the kitchen and bathroom.  That I can pay for with cash and do the majority of the work myself after insurance has come in a took care of their part.  The entire house wont be permanently fixed, but the damage will be repaired and I'll have more time to figure out whether we want to do anything with the other side. 

ShoulderThingThatGoesUp

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Re: how to handle construction loan + mortgage refi + car loan payoff
« Reply #7 on: February 26, 2015, 06:30:53 AM »
Every year an organization publishes "cost vs. value" reports. Maybe you can hack the cost, but never the value. I can't really link to them because they require registration, but look up 2015 cost vs. value reports to get one for Maine. That'll give you an idea what your return on investment is.

It sounds like sinking a bunch of money in will solve half your problem - so another bad winter might give you the same problem on the other side of the house.