complicated question on mortgages/planning

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Rx Senior
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I am buying a house right now and I also need to do some renovations. I'm weighing all my options here and my 1st mortgage will only give me 80% of purchase price/appraisal (lesser of). I'm fairly sure my appraisal will be more than purchase price so that isn't the issue.

My issue is in the renovations. I'm looking at investing $80k-$100k in renovations and do not have the cash to do this. This will be a priority and we will not move into the home until the renovations are done.


here are the options I'm currently considering...How should I structure this? or variations of this:

1)
-buy no points on my 1st mortgage, get a 4.35% 30 year fixed
-take out $80k-$100k in a HELOC (needs to be obtained through another credit union and avoids PMI)...i think rate is near 4%
-when the work is done (3-4 months after close of sale), refi- with points at lowest rate available.

2)
-buy no points on my 1st mortgage, get a 4.35% 30 year fixed
-take out $80k-$100k in a 20-year HE LOAN currently at 6.5% (needs to be obtained through another credit union and avoids PMI)
-when the work is done (3-4 months after close of sale), refi- with points at lowest rate available.
-if for some reason the rates skyrocket, I'll just sit locked in at the 4.35% and 6.5%

3)
-buy 2 pts on my 1st and get a 30 year fixed at 3.875%
-take out $80k-$100k in a 20-year HE LOAN currently at 6.5% (needs to be obtained through another credit union and avoids PMI)
-do not refi, I'll just sit locked in at the 3.85% and 6.5%....while hoping to accelerate HE Loan pmts to pay within 20 years

4)
-buy 2 pts on my 1st and get a 30 year fixed at 3.875%
-take out $80k-$100k in a HELOC (needs to be obtained through another credit union and avoids PMI) I think rate is near 4%
-do not refi, I'll just sit locked in at the 3.85% and 4%....while hoping to accelerate HELOC pmts to pay within 20 years



also, i can probably subsidize $20k or so of the HELOC/HE LOAN costs especially if I end up not able to refi 6 months down the road.

I think a lot is dependent on if I think interest rates are going to go up soon (I do not think that) and if I want to pay 3 sets of closing costs (I think credit unions reimburse closing costs if you keep the HE open for a year or two).

looking for other options out there as well if any.....i went through a FHA constrution loan the fees alone are near $20k so I just stopped looking at that route.
 

Home of the Cincinnati Criminals.
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Why not buy a house that doesn't need so much work?
 

Rx Senior
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Why not buy a house that doesn't need so much work?

that is not part of the scenario....

hahaha....nah, we have looked but this house is actually a pretty good deal and a home of this size fixed up is something we would normally not be able to afford.....

plus, it will be almost brand new on the interior...sounds pretty exciting to me.
 
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is it not possible to move in and gradually fix it up as you can afford to? This is your first home right? That would be the best if you could do that and it would be way cheaper and if you did some of the work yourself, you would take some pride in it.
 

Rx Senior
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you guys are avoiding my question....

aceduecetrey, I agree with you but the biggest issue is with someone working on it full time we should only have to wait 3 months to move in. My wife will NOT move in until this is done.

there will still be some small things I can work on after this is done but until then I'm gonna just have to bite the bullet and figure out which way I have to structure the financing
 

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You made this comment " I'm fairly sure my appraisal will be more than purchase price so that isn't the issue."

If you even have to make that statement what makes you think you will have 80K-100K in equity to use for the HE Loan? You would have to be getting a deal that you walk into with at least 100K of equity for a bank to give you a second mtg or a HELOC.
 

Rx Senior
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You made this comment " I'm fairly sure my appraisal will be more than purchase price so that isn't the issue."

If you even have to make that statement what makes you think you will have 80K-100K in equity to use for the HE Loan? You would have to be getting a deal that you walk into with at least 100K of equity for a bank to give you a second mtg or a HELOC.



it really depends on what they base their HELOC on.

I'm paying 20% down so there is only 80% debt to loan.

The two credit unions i'm looking at gives HELOC at 90% and 95%. if they are going 95% of purchase price then I will be okay. however, I read in fine print that they may use state assessment (most recent), if that is the case, then I am well within the $100k amount

(the home is $645k and after $129k down, my loan will be for $516k.....state assessment is at $764k so if they use that then I will be more than ok)





again, whether or not I can get the loan/money and what other methods of building a home (incrementally) is not the issue. I understand my options, i just don't know which way to go.
 

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really need to see what the difference is in payment when comparing 0 points to 2 points. If loan size is larger , the monthly savings might be worth paying the pts, but chances are 2 points doesnt equate to savings if rate only drops .5 point
 

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If forced i would do option #2

your effective interest rate after your income tax breaks is gonna be pretty low, almost an interest free loan.

once you get your HE loan, then in 1 or 2 years (3 to 4 months lol) when you finish the work on your home you can try to refi everything into one low % loan, if not just make extra payments toward the HE loan.

personally every time I do the math to justify buying points it just doesn't work out. It's been about a year since I refied my home I got the rate down to 4.75%. the stock market has been doing so poorly I've been putting that money toward extra payments to the home.

good luck
 

Word.
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I've got a moneyline parlay for your down payment so you can pay this is cash.

Seriously though, #2 is the best option. Buying points is typically only a good idea if seller paid closing costs result in a surplus. And the loan is better than the loc because the extra 2% for a few months is worth the comfort of the speculations regarding tax and interest rates. Lock yourself in safely if its temporary, then weigh your options again in a few months.

Just my opinion.
 

Rx Senior
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I think option #2 is probably the smartest but it gives me the highest monthly payment over the next 5-6 months.

here is where the gambler in me gets the best of everything but I don't envision rates going up in the next 6 months (in fact, doubtful, but may possibly go down further), and if that is the case, I am 100% sure to refi into a single mortgage. I think i'm going to go the HELOC at 4% knowing it won't move (hoping really, but they can't rise more than 1% per quarter per contract). (Option #1)

and I think i will buy points when I do the refi.....depending on the interest rate and point differential, but I think if you intend to keep the mortgage for like 7-10 years than the points will pay for themselves (ignoring time value of money) and after that it is pure savings. At the rates today, I cannot imagine another refi meaning I will keep this long enough unless I move and need to sell current home.


Is my logic flawed here?
 

Word.
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I think option #2 is probably the smartest but it gives me the highest monthly payment over the next 5-6 months.

here is where the gambler in me gets the best of everything but I don't envision rates going up in the next 6 months (in fact, doubtful, but may possibly go down further), and if that is the case, I am 100% sure to refi into a single mortgage. I think i'm going to go the HELOC at 4% knowing it won't move (hoping really, but they can't rise more than 1% per quarter per contract). (Option #1)

and I think i will buy points when I do the refi.....depending on the interest rate and point differential, but I think if you intend to keep the mortgage for like 7-10 years than the points will pay for themselves (ignoring time value of money) and after that it is pure savings. At the rates today, I cannot imagine another refi meaning I will keep this long enough unless I move and need to sell current home.


Is my logic flawed here?

#1. LOC vs Loan
Loan - 6.4% rate (rounded down to make this an easier example)
LOC - 4% rate (assumed)
Difference 2.4%/12 months = .002/month
Amount borrowed = $80,000 - $100,000
Difference paid in interest per month = .002 x (80K-100K) = $160 - $200
It really is that easy. You're paying $160 - $200 a month to insure that the rate is locked in whether their is a global emergency, whether the rates skyrocket, whether the refi market totally changes course and you're unable, whether the housing market plumets and your home doesn't make appraisal, whether the cost of construction increases substantially, whether the house doesn't make inspection following construction, etc. Also, I'm sure you're aware that HELOC loans are only tax-deductible up to $100K, so you wouldn't want to pass that either? I'm pretty conservative, but I'm just giving you my view of your options.

#2. Buying points
It just depends on what your goals are, but what it sounds like from both questions is you're looking to increase your overall cash flow, or decrease the cost of this house on your monthly budget. Can't say I blame you, but there are probably better options than buying points. I would need to know the specifics of the cost of the points, what the rate you're buying it down to, what the original rate is, what the other year rate options are, etc. Your loan officer should go over all of this with you and give you plenty of options when you refi, but I'm telling you, it is almost never a good financial decision to buy points unless there is leftover surplus in seller's closing costs.
 

Rx Senior
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#1. LOC vs Loan
Loan - 6.4% rate (rounded down to make this an easier example)
LOC - 4% rate (assumed)
Difference 2.4%/12 months = .002/month
Amount borrowed = $80,000 - $100,000
Difference paid in interest per month = .002 x (80K-100K) = $160 - $200
It really is that easy. You're paying $160 - $200 a month to insure that the rate is locked in whether their is a global emergency, whether the rates skyrocket, whether the refi market totally changes course and you're unable, whether the housing market plumets and your home doesn't make appraisal, whether the cost of construction increases substantially, whether the house doesn't make inspection following construction, etc. Also, I'm sure you're aware that HELOC loans are only tax-deductible up to $100K, so you wouldn't want to pass that either? I'm pretty conservative, but I'm just giving you my view of your options.

#2. Buying points
It just depends on what your goals are, but what it sounds like from both questions is you're looking to increase your overall cash flow, or decrease the cost of this house on your monthly budget. Can't say I blame you, but there are probably better options than buying points. I would need to know the specifics of the cost of the points, what the rate you're buying it down to, what the original rate is, what the other year rate options are, etc. Your loan officer should go over all of this with you and give you plenty of options when you refi, but I'm telling you, it is almost never a good financial decision to buy points unless there is leftover surplus in seller's closing costs.


great analysis on the HELOC vs. the HE Loan

with that being said which method makes more sense to you? $160-$200 a month for 4-6 months is a lot of money to me for what I consider very minimal risk.....
 

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80-100K in renovations is as much as some people pay for their entire house. Most of these renovations on "Flip this House" are done for around 40K and that's for the entire house.

I wouldn't buy it but that's just me. I wish you luck shadow.
 

Rx Senior
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80-100K in renovations is as much as some people pay for their entire house. Most of these renovations on "Flip this House" are done for around 40K and that's for the entire house.

I wouldn't buy it but that's just me. I wish you luck shadow.

the area that i'm getting has been seeing sales for more than the value of the homes. the home i think is being sold for about $100k-$120k below market value for an "average" house. I think if i put in the $80k then the home would sell for about $200k more than what i'm paying for it.

the renovations include a lot.....two complete bathrooms redone (including bringing out the wall on the master bath to make it bigger and adding a walk-in closet right outside the bathroom), complete new kitchen, new flooring throughout the home (2380 sq ft) and new drywall covering almost the entire house including ceiling. Also adding a few walls.
 

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You can get an 30y FHA loan at 4.25% (or perhaps lower) up to 96.5 LTV. That leaves some cash in your bank account to subsidize the home improvements rather than dealing with the 2nd mortgage. Obviously there are costs that go into FHA loans, i.e. upfront and monthly PMI, but depending on the loan amount it could offset the costs of the 2nd mortgage. And PMI is 100% tax deductible. If your purchase price is north of $300k i'd probably advise you to stay away from FHA. Just food for thought.

FHA also gives you a opportunity to streamline to a lower if rates get retardedly low.
 

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6 years employed in just about every possible position within a mortgage broker shop. I would not pay points.
 

Rx Senior
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You can get an 30y FHA loan at 4.25% (or perhaps lower) up to 96.5 LTV. That leaves some cash in your bank account to subsidize the home improvements rather than dealing with the 2nd mortgage. Obviously there are costs that go into FHA loans, i.e. upfront and monthly PMI, but depending on the loan amount it could offset the costs of the 2nd mortgage. And PMI is 100% tax deductible. If your purchase price is north of $300k i'd probably advise you to stay away from FHA. Just food for thought.

FHA also gives you a opportunity to streamline to a lower if rates get retardedly low.


I looked at a few FHA things and the fees were pretty high. Not to mention purchase price is well over the $300k you suggested.

I also don't like PMI. It wasn't always tax deductible and I don't think it will be for much longer.....also it phases out and I don't think me and my wife would get that deduction....

although i love the fact they go 96.5 LTV, my credit unions do 90 and 95 so I think i'm covered.


thanks for the idea....not a bad option for others in somewhat similar situations
 

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