financing home improvements for new home purchase? Roll in mortgage, heloc. hel?

[Anonymous]

I know we should ask our lender, but I'm I thought I'd ask here too. Our position=excellent credit, enough $$ to purchase the
500+k home outright, but choosing to instead put down 20% and finance the rest because it makes more financial sense from an interest perspective.

I want to put in 35k of improvements into the house before we move in. Do lenders roll in home improvement costs into mortgages anymore, or do they give HEL or HELOCs right after settlement? Which is best in your opinion?

[Anonymous]

If you can plunk down $500k cash, why fret about $35k of improvements? Just pay cash for those.

Most lenders get antsy when the loan-to-value exceeds 80%. Some might be able to work with you, though.

[Anonymous]

Anonymous wrote:If you can plunk down $500k cash, why fret about $35k of improvements? Just pay cash for those.

Most lenders get antsy when the loan-to-value exceeds 80%. Some might be able to work with you, though.

^^^ WSS

[Anonymous]

PP - huh?

OP - you will have a difficult time getting any bank to roll in improvement money. Those days are gone!

We are in the process of buying as well, the house needs quite a bit of improvement. We are buying about $200K below our "approved" loan amount, but makes no difference to them. they will only loan on the sales prices and that's it.

As the other PP said - $35K is not that much in the grand scheme so I would go ahead and pay cash. In the end, you're better off doing that anyhow. Why pay interest for the next 15-30 yrs on 35K when you can pay it outright which would equate to losing only 1% interest in your bank account, if that?

either that or move into the house, live with it the way that it is. wait until you have enough equity built up and take out a HELOC. that's what we're going to do.

[Anonymous]

OP here, I am sort of stupid about money, I know enough to let my husband handle things (that sounds horrible, ugh). He says he doesn't want to pull 35k out of a high-interest earning account when he could finance it for a low rate. I guess it would save us more money where it is currently? I don't get it either.

[Anonymous]

OP again, could we take out a HELOC on a rental property that we own? Even though it isn't our primary residence?

[Anonymous]

What is the interest rate on the savings account vs. the interest rate you would pay on the $35K if you borrowed it? Unless they are wildly different in favor of the latter (very hard to imagine with interest rates these days) I don't see the logic to doing this. And even if there is an advantage, there is also a disadvantage to taking on extra debt.

I don't understand your husband's reasoning here, unless taking out $35K from your bank leaves you with no savings--in which case, you shouldn't do the work to begin with.

I realize I am more financially conservative than many but that's my take on this.

[Anonymous]

I am a a lender with MetLife Home Loans and can give you a bit of information. It is true that the days of financing construction costs before moving in are mostly gone. Most banks do not even offer remodel / construction loans anymore. If they do have construction loans, there are minimum loan amounts that are far higher than your budget of $35K.

The one program that could work perfectly for you is a Streamline FHA 203K loan. It will allow you to purchase and finance up to $35K of improvement costs (flooring, kitchen remodel, painting, bathroom remodel, etc). Some things to note:

1. The after improved value will be detrmined by an appraiser who examines your project description
2. Your contractor has to be licensed and approved by the lender
3. Improvements can not involve structural repairs or changes - this is allowed with an expanded 203K program

I would recommend talking with Tim Whittier at First Home Mortgage [phone] or [e-mail]. He is a 203k / construction lending pro.

Roger Dennis - [phone]

[Anonymous]

Anonymous wrote:OP again, could we take out a HELOC on a rental property that we own? Even though it isn't our primary residence?

Yes, I think so. If your husband believes that it's cheaper to borrow now than to pull money out of an investment account, then this seems like a good option.

[Anonymous]

I'm just going to say, OP, that it seems ludicrous to me to borrow $35K and pay interest on it when you could write a check for the improvements. I get that you might get a slightly higher return on your investment if you invested the $35K but really, could it be that much? And you're not factoring in risk. There's always some risk that you or DH loses a job and it becomes difficult to make loan payments. Seriously, just write a check for the improvements.

And if it were me, I'd write a check for the house, too. Because the mortgage interest deduction is small potatoes in comparison to the amount you're paying in interest every month. Again, I'm super conservative like another PP but please consider the below as an argument against taking out a mortgage at all (from a financial website I read).

If you have a $200,000 mortgage at 5%, you pay $10,000 a year in interest. If you pay the bank $10,000 and make $150,000, you deduct the $10,000, which is why your accountant brought this up. If you deduct that tax money, you’ll only pay taxes on $140,000 in income instead of $150,000.

If you buy a house with cash and have no interest to deduct, you’ll pay taxes on $150,000 in income. If you’re in a 33% tax bracket, that $10,000 difference in income would be taxed to the tune of $3,300. Your accountant thinks it’s a good idea to send $10,000 to the mortgage company so you don’t send $3,300 to the government. I’m not going to trade a dollar for a quarter and call that smart. You’re just someone who has produced, and as such you must be punished by the government.

[Anonymous]

Anonymous wrote:

Anonymous wrote:If you can plunk down $500k cash, why fret about $35k of improvements? Just pay cash for those.

Most lenders get antsy when the loan-to-value exceeds 80%. Some might be able to work with you, though.

^^^ WSS

WSS = What She Said

[Anonymous]

Anonymous wrote:... please consider the below as an argument against taking out a mortgage at all (from a financial website I read).

If you have a $200,000 mortgage at 5%, you pay $10,000 a year in interest. If you pay the bank $10,000 and make $150,000, you deduct the $10,000, which is why your accountant brought this up. If you deduct that tax money, you’ll only pay taxes on $140,000 in income instead of $150,000.

If you buy a house with cash and have no interest to deduct, you’ll pay taxes on $150,000 in income. If you’re in a 33% tax bracket, that $10,000 difference in income would be taxed to the tune of $3,300. Your accountant thinks it’s a good idea to send $10,000 to the mortgage company so you don’t send $3,300 to the government. I’m not going to trade a dollar for a quarter and call that smart. You’re just someone who has produced, and as such you must be punished by the government.

What the website forgets to include in it's example is what's happening with the $200,000 that you might otherwise use to buy the house. In other words ...

Option A: Put your $200,000 cash toward purchase of the house, and take no mortgage. Pay taxes on $150,000 with no mortgage-interest deduction.

Option B: Buy the house with a $200,000 mortgage at 5%. Pay the bank $10,000/year in mortgage interest, and save $3,300 in taxes due to the mortgage interest deduction. But also, invest the $200,000 cash, so you can earn interest/dividends/gains. If you're earning about 4% on that $200,000, then you're breaking even. If you earn anything more than 4%, you come out ahead.

[Anonymous]

Oops -- "its" not "it's"

[Anonymous]

Anonymous wrote:

Anonymous wrote:... please consider the below as an argument against taking out a mortgage at all (from a financial website I read).

If you have a $200,000 mortgage at 5%, you pay $10,000 a year in interest. If you pay the bank $10,000 and make $150,000, you deduct the $10,000, which is why your accountant brought this up. If you deduct that tax money, you’ll only pay taxes on $140,000 in income instead of $150,000.

If you buy a house with cash and have no interest to deduct, you’ll pay taxes on $150,000 in income. If you’re in a 33% tax bracket, that $10,000 difference in income would be taxed to the tune of $3,300. Your accountant thinks it’s a good idea to send $10,000 to the mortgage company so you don’t send $3,300 to the government. I’m not going to trade a dollar for a quarter and call that smart. You’re just someone who has produced, and as such you must be punished by the government.

What the website forgets to include in it's example is what's happening with the $200,000 that you might otherwise use to buy the house. In other words ...

Option A: Put your $200,000 cash toward purchase of the house, and take no mortgage. Pay taxes on $150,000 with no mortgage-interest deduction.

Option B: Buy the house with a $200,000 mortgage at 5%. Pay the bank $10,000/year in mortgage interest, and save $3,300 in taxes due to the mortgage interest deduction. But also, invest the $200,000 cash, so you can earn interest/dividends/gains. If you're earning about 4% on that $200,000, then you're breaking even. If you earn anything more than 4%, you come out ahead.

But if you invest the $200K in something with the potential for a significantly higher than 4% rate of return, there is a decent risk that you'll lose it. Just look at the rates of return for most stocks and mutual funds since the housing crash. It's just not worth even a small risk, to me. I'd so much rather buy the house outright, have no mortgage and then very quickly save cash again to invest. It will be pretty easy to stockpile money to invest if you have no mortgage payment. And if you have no mortgage payment and your investments go belly up, no big deal because you don't have a mortgage payment. So much safer to me.

[Anonymous]

Anonymous wrote:But if you invest the $200K in something with the potential for a significantly higher than 4% rate of return, there is a decent risk that you'll lose it. Just look at the rates of return for most stocks and mutual funds since the housing crash. It's just not worth even a small risk, to me. I'd so much rather buy the house outright, have no mortgage and then very quickly save cash again to invest. It will be pretty easy to stockpile money to invest if you have no mortgage payment. And if you have no mortgage payment and your investments go belly up, no big deal because you don't have a mortgage payment. So much safer to me.

That's a perfectly legitimate attitude to take. Some are willing to take a little more risk for the return, and others are not. But it's not a no-brainer, "trade a dollar for a quarter" situation.