Author Topic: Downpayment & Financing ?  (Read 4719 times)

tightwad

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Downpayment & Financing ?
« on: February 25, 2012, 01:20:44 PM »
We're getting ready to purchase a home for $75K (will be our home, not a rental).  The home needs $15K in home improvements.  We have about $77K cash and no debt.  My question is what would be the best way to purchase the home:
1. Buy the home with cash, depleting virtually our entire savings (including emergency fund), then take out a personal or construction loan for the improvements?
2. Put down $50K or so, then mortgage $25k to cover the improvements, which also allows us to keep emergency cash on hand?  Once the improvements are done, we'd immediately begin paying back the mortgage.  Should take less than 1 year for us to pay this off.
3. Other recommendations?

A few factors in the decision:
1. The up-front cost of taking out a mortgage will be roughly $1400 for closing costs & appraisal (this is an expense we could avoid paying cash).
2. After our monthly living expenses we're able to stache around $2700/month in savings.  By the time we would close on the house we'll have $80K-$82K in savings.

Any help or suggestions would be appreciated.  Thanks!

AJ

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Re: Downpayment & Financing ?
« Reply #1 on: February 25, 2012, 02:02:39 PM »
Are you sure you would only pay $1400 in closing costs? Do you have a good faith estimate from your lender? Is the house habitable without the improvements? Could you maybe pay cash for the house and cash-flow the improvements over the next year or so? If the house is in good enough condition that it can finance, it's probably in good enough condition to live in, at least for a time.

Obtaining financing is a huge hassle and expense. If you can avoid it, and you plan on paying it off quickly, I say go cash.

arebelspy

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Re: Downpayment & Financing ?
« Reply #2 on: February 25, 2012, 02:23:45 PM »
Skip the loan, pay cash.  Improve the house over time.

You'll have 80-82 when you close - 77 = ~4k.  You need 18.  That leaves you short 14.  If you spend 6 months repairing it, throwing your $2700/mo savings at it (which will be larger with no rent now, remember), that's already enough money.

Even if you had to (gasp) charge a credit card for some of the repairs, the interest you'd pay at 10% would be less than the costs of the loan.

That is, due to the closing costs of the loan:
The up-front cost of taking out a mortgage will be roughly $1400 for closing costs & appraisal (this is an expense we could avoid paying cash).

You could charge a bit of the repairs and still pay less than getting that loan.  The APR on $1400 for 14k for 6 months is like 20%.  The financing will cause more hassles and cost more.  Skip it.

(Note: I'm not advocating a credit card.  Pay cash for the repairs. And if you can, string out those repairs and upgrades over the first year to space them out.  Just pointing out that even a CC would be cheaper than a loan like that.)
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Reido

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Re: Downpayment & Financing ?
« Reply #3 on: February 26, 2012, 07:47:09 AM »
What is your risk tolerance??

Mortgage rates are incredibly low right now and in the long-run it's almost inevitable that virtually any investment will outperform an interest rate of less than 4% for a 15 year mortgage.

If I were in your shoes I'd put $25K down and take out a 15yr mortgage...  update the house as needed, but place the vast majority of the money into a Permanent portfolio style investment and then make payments over the full 15 years.

Granted, I have a relatively secure job (medical sector) so I tend to lean more towards investment and away from "emergency" cash.  Then again, one of the advantages of the Permanent portfolio is that it is 25% cash anyway...  Sorry if I wandered a little off topic.

http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/

salmp01

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Re: Downpayment & Financing ?
« Reply #4 on: February 26, 2012, 11:46:56 AM »
Consider paying cash for the house then take out a line of credit against the property.  When I did this there was no closing costs and if your LTV is less than 50% you should get a variable rate of somewhere around 5%.  if you plan on paying this off shortly this may be your best option.

arebelspy

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Re: Downpayment & Financing ?
« Reply #5 on: February 26, 2012, 11:56:35 AM »
Consider paying cash for the house then take out a line of credit against the property.  When I did this there was no closing costs and if your LTV is less than 50% you should get a variable rate of somewhere around 5%.  if you plan on paying this off shortly this may be your best option.

Can you do that right after closing?

I know with refis they often want six months to a year seasoning on title.  But I haven't don't LOCs personally.
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tightwad

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Re: Downpayment & Financing ?
« Reply #6 on: February 26, 2012, 01:57:37 PM »
Thanks everyone for your time and suggestions.

AJ - I do have the $1400 number for closing/appraisal in writing from the lender.  The house is technically habitable, but replacing all of the floors is one of the improvements that needs to be done before moving in.  The reason is because the house is 35 yrs old, and it has the original shag carpet throughout, including in the bathrooms.  I find that to be unsanitary, especially with a 5 year old and 2 year old who play on the floor constantly I want them to have a clean environment.  For the most part the other home improvement items could wait and be done as we save for them. 

Arebelspy - Thanks for the numbers regarding the financing cost.  The $1400 cost to take out a mortgage which will ultimately become a short-term loan is definitely the main reason I'm hesitant about taking out a mortgage.  I'd rather see the $1400 be put into improvements.   We don't currently pay rent or have a mortgage so our savings per month won't go up (very fortunate temporary situation).  Once we move it eliminates my commute, but the savings there will be offset by taxes/insurance on the property (~$100/month).

Reido - My risk tolerance is currently somewhat low, not from an investment perspective, but from not having some emergency cash on hand.  We've moved to a very rural area, and if something were to happen with my job (also medical related but i do IT work) we would need to consider moving back to a more populated area for me to obtain work in my field.  I don't foresee that happening, but it's a risk I need to be prepared for which is the main reason I'm hesitant to drain savings completely.  Thanks for the link, I will read up more on Permanent Portfolio investing.

psalmela - Going with a HELOC was something I'd thought about, but wasn't sure how that would work on a newly purchased property?


 

smedleyb

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Re: Downpayment & Financing ?
« Reply #7 on: February 26, 2012, 02:33:17 PM »
Personally, I would advocate putting 15K down, paying the 15K (or whatever you determine as necessary) for the improvements out of cash, and financing 60K for 30 years.  Normally I would say 15 years if possible, but with rates this low it makes sense to go for the  longest term (even if it's .5% in interest more since we're hedging against inflation here) and bank/invest  the difference between the 15 and 30 year mortgage.  The point is give yourself as much flexibility as possible at the start with the understanding you can always pay off the mortgage in a couple of years without wiping out your stash of cash (given that you're banking over 30k a year -- which rocks, BTW!).

Also, sounds like the place just needs new flooring throughout; cost effective solutions exist which could cut your total improvement budget in half. 

Good luck. 





Joementum

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Re: Downpayment & Financing ?
« Reply #8 on: February 27, 2012, 01:28:50 AM »

psalmela - Going with a HELOC was something I'd thought about, but wasn't sure how that would work on a newly purchased property?


 

As far as I know, it is no different than an older property. It's paid off and in your name. I don't see why a bank wouldn't give you a HELOC for the home. You should ask your lender first though.

sirspiffy

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Re: Downpayment & Financing ?
« Reply #9 on: March 06, 2012, 06:12:47 PM »
I like the pay cash get HELOC idea, talk to your bank they might even be able to do it all same day as closing the heloc fee's are significantly lower than mortgage origination don't know about rates though.  Local banks are generally more flexible than National, and then credit unions.  Maybe you could get the current owner to finance some of the repairs for a note.  Talk to the contractors see if they'll accept a note as a form of payment.  Or really anybody who'll take a note for whatever interest you wanna give 'em

tightwad

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Re: Downpayment & Financing ?
« Reply #10 on: April 15, 2012, 08:59:05 PM »
Update - After much deliberation we opted to pay cash for the house, then prioritize the updates/repairs and cash-flow them.  After a month of working our butts off on the house we officially moved in late last week.  There are still some things we will be doing over the coarse of the next year or so as we save up for them, but the core items to make the house nice and liveable are done and we couldn't be happier.  The feeling of owning our home is great.  Thanks again for all of your input.  I really do appreciate it.

gooki

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Re: Downpayment & Financing ?
« Reply #11 on: April 15, 2012, 10:53:58 PM »
Well done.

arebelspy

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Re: Downpayment & Financing ?
« Reply #12 on: April 16, 2012, 07:38:59 AM »
Good choice.  Glad it worked out for you. Congrats on the purchase and good luck on the upcoming improvements!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.