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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127236  
Subject: financing the next house Date: 12/12/2013 8:14 AM
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We're planning on downsizing, and would like to build again, so are looking for land. We will consider a house with enough land that DH can build a barn in the backyard as well, but even if we find one, I know we will be doing major renovations. Assuming we will buy land and build, it will take at least a year for us to get from land acquisition to finished house, and most likely longer.

We still have a mortgage on this house, but we have about 80% equity in it. The plan is that we will move into the new house first, and then market this one.

I'm trying to figure out the best/easiest way to do the financing given that we will most likely be carrying both properties for a short time, and will then pay off the new house once we sell the current house, ending up with no mortgage as we move into retirement.

Does it make more sense for us to take out a HELOC on this house now, and draw down that money as we go to build the new house? That would put all the debt on this property, and would leave the other property unencumbered. There would be payments due on the loan along the way that I assume would be interest and some principal. It would make the land purchase a cash sale, and I wouldn't have to wait for the financing to come through.

Or does it make more sense to pay cash for the land, and then take out a construction loan on the new property instead? I don't think we could get a construction loan to acquire the property since we won't have house plans until we have land so that the house will be designed to sit properly on the lot, and from experience, designing the house will take us a good 6 months or longer (took a year for this house, but we weren't in any hurry as the landowner didn't want to finalize the sale for a year).

I'm thinking that getting a construction loan to acquire and then build the house will not be possible because we won't have house plans until after we get the land. Is that a good assumption?

I'm just trying to get my hands around a financing plan for this while we look for land, knowing full well that it takes us a very long time to find the right thing for us, so we might not even find the land for another year. I just like to have a plan in mind so I know what I'm doing.

Anyone have any suggestions?
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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126654 of 127236
Subject: Re: financing the next house Date: 12/13/2013 2:03 PM
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All of your details considered... pulling HELOC money, or even a small cashout refi 1st plus HELOC, on your existing place, will be cheaper, easier, less red tape & hurdles, and give you more control along the way.

Construction financing is easier and cheaper (if you need it at all) the more established & certain the building plans.

In a perfect world, if you could draw equity funds from the old property to acquire & develop the new property, then sell the old place to satisfy the leverage & be in a low overhead, fully developed, owner-occupied position to decide how you want to position your equity thereafter.

Luck!
Dave Donhoff
Leverage Planner

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126656 of 127236
Subject: Re: financing the next house Date: 12/13/2013 5:19 PM
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Thanks, Dave. Sounds like the HELOC will be the way to go.

This is probably a better question for the tax board, but if we do the HELOC and we take out less than the initial cost of this house, but more than the initial mortgage, and we can track all the payments as going towards the new house, would the interest be deductible? Anyone know?

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126659 of 127236
Subject: Re: financing the next house Date: 12/13/2013 5:29 PM
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if we do the HELOC and we take out less than the initial cost of this house, but more than the initial mortgage, and we can track all the payments as going towards the new house, would the interest be deductible?

initial cost of the house isn't irrelevant.

A HELOC for more than the current mortgage is just like a regular cash-out refinance.
The part that's being refinanced (that was purchase money) is deductible.
The part that's more than that, but less than $100K is probably deductible.
And since you can track it going toward a new house that you'll live in, *maybe* that's deductible too since it is a "qualified home".
(I'd get the loan lined up, figure out if you're >$100K over, then post particulars on the tax board for more experienced opinions)

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126705 of 127236
Subject: Re: financing the next house Date: 12/16/2013 9:34 AM
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Hi foo1bar (and all,)

I haven't gone to the tax board to check on 2gifts' inquiries (I have little doubt she's done that diligence... I haven't had much time in the neighborhood recently.)

HOWEVER, didn't want to leave the last post as the last post, as its inaccurate;

A HELOC for more than the current mortgage is just like a regular cash-out refinance.
The part that's being refinanced (that was purchase money) is deductible.


If you started with $400,000 in purchase loan(s) on your primary residence, all the interest on it would be deductible.
If you paid down the principal to $50,000, and then got a HELOC for $100,000, the interest on all of it would be deductible.
Interest on any leverage above the *remaining* balance (not original balance) of the original purchase leverage, plus $100,000, is *not* deductible against taxable income.

In short; Any deductions you may have once had on your original purchase leverage is permanently surrendered as you give back that leverage by paying in principal.

Cheers,
Dave Donhoff
Leverage Planner

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126708 of 127236
Subject: Re: financing the next house Date: 12/16/2013 12:45 PM
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HOWEVER, didn't want to leave the last post as the last post, as its inaccurate;
Actually it was more accurate than yours.

What I said (part that you left out bolded):
"A HELOC for more than the current mortgage is just like a regular cash-out refinance.
The part that's being refinanced (that was purchase money) is deductible.
The part that's more than that, but less than $100K is probably deductible."

What you said:
If you started with $400,000 in purchase loan(s) on your primary residence, all the interest on it would be deductible.
If you paid down the principal to $50,000, and then got a HELOC for $100,000, the interest on all of it would be deductible.

You imply that it is deductible without any doubt.
Like I said, an amount of less than $100K beyond the balance from the purchase money is probably deductible - it depends on value of the house.
Only if the house is worth >$450K is all the interest deductible.


Here's the relevant IRS publication.
http://www.irs.gov/publications/p936/

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126711 of 127236
Subject: Re: financing the next house Date: 12/16/2013 3:09 PM
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Sorry I'm a little late to the party. Regarding home mortgage interest, I find it clearer to think of it as:

1. Acquisition debt
2. Equity debt

YMMV. As someone mentioned, all is revealed in Pub 936.

One thing that I don't think has been mentioned is that equity debt is not deductible under AMT.

Phil
Rule Your Retirement Home Fool

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126801 of 127236
Subject: Re: financing the next house Date: 2/7/2014 10:19 AM
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I'm resurrecting this thread to continue the discussion, and would like some feedback on my additional thinking, particularly given the great feedback I got from everyone when I asked previously.

I am now thinking that it makes the most sense to just do a straight refinance of my existing mortgage. I have a 10-year FRM at 3.49% at my credit union that will be paid off in 2019. If I refinance that to a 3/1 ARM, which is currently around 2.75% with no points at my credit union, I can pay the new payment, and put the savings aside to go towards the land and new house construction.

I am thinking that this would avoid taking out the HELOC, where I would be paying interest on the money while it just sits in the bank, and it would avoid the issues around that portion that is not deductible as well as the AMT that was mentioned.

I could then use cash to acquire the land (we are still looking), take however long to do the plans, and then go to the same bank we used the last time for this house to get a construction loan when I need it. They will take the land as a downpayment, and will finance up to 80% of the total cost, which means we would actually get some money back that we had used to purchase the land to use towards the construction. They do a construction loan to mortgage program that has just one closing. Having the lower payment on this house will also help with our debt ratios, although they will still be under that 43% mentioned in another thread.

This would make it easier financially since it wouldn't be as tight, and would let us continue with the plan to build the new house first, move into it, and then sell this house. Once this house sells, we would pay off its remaining mortgage plus the mortgage on the new house, and put the remaining cash in the bank to backfill the savings that I had tapped, and to leave some money for a 2nd house down the road.

I am thinking that the best case is we are 2 years from being out of this house, and worst case is that we are 5 years away, so even if we have one reset period where the rate increases the full 2% putting us around 4.75%, that would be for a very short time.

I think this gives us the most flexibility and least stress, but I'd love some input/critiques.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126802 of 127236
Subject: Re: financing the next house Date: 2/7/2014 10:41 AM
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Sounds pretty complicated to me. The problem with a complicated machine with lots of moving parts is that if any one thing goes wrong, the whole thing comes crashing down around your ears.

You are worried about paying interest while money just sits there, and piddly things like non-deductibility of points, etc. Whan you should be focussing on is "what if something goes wrong?" You should be focussing on risk first & foremost, not taxes and not low earnings on cash.

the plan to build the new house first, move into it, and then sell this house

If things go pear-shaped, you'll be in the position of a number of people I have seen in our area. Old house gets a realtor For Sale sign in the yard, then a few months later a sign from a different realtor,......then a different one.....then BOTH houses get a For Sale sign, and they move into whichever house doesn't sell.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126803 of 127236
Subject: Re: financing the next house Date: 2/7/2014 11:10 AM
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You are worried about paying interest while money just sits there, and piddly things like non-deductibility of points, etc. Whan you should be focussing on is "what if something goes wrong?" You should be focussing on risk first & foremost, not taxes and not low earnings on cash.

I think it's my nature to worry about the small things, but I am the queen of contingency plans, and think I have the bigger things in hand.

If things go pear-shaped, you'll be in the position of a number of people I have seen in our area. Old house gets a realtor For Sale sign in the yard, then a few months later a sign from a different realtor,......then a different one.....then BOTH houses get a For Sale sign, and they move into whichever house doesn't sell.

The plan I presented allows us to afford both houses exactly because I have seen the situation you describe. I don't want to be there, and having a higher mortgage payment as I do now seems to be riskier than replacing it with one that is about a third the size.

So how would you do it? Sounds like you would sell the existing house first, move some place else temporarily, and then build. I don't want to do that, and seem to have found a proposal that accomplishes my goal, is affordable for the long term, and doesn't leave us broke or more stressed.

I'm open to suggestions, but just telling me that it's too complicated didn't offer an alternative solution, which I would certainly welcome and find helpful.

I do realize that you don't know my entire financial picture, and so have to make some assumptions there, so I can't blame you for assuming that it is a house of cards, and one small wind will bring it down. Got a better alternative to simplify it as you suggest needs to be done?

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126804 of 127236
Subject: Re: financing the next house Date: 2/7/2014 1:00 PM
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Since I've read a number of your posts over the years and met you in person, I don't have the same concerns as ray. I think it's a fine plan. What is the difference in rate between the 3/1 and 5/1 ARM. If it isn't much, then the interest rate protection ofthe 5/1 may be nice in case your worst case becomes 6 years. As for what you do when you finally build your new house and sell your old house, I would analyze your choices at that time for what you do with the proceeds from the old house rather than automatically making the decision to pay off the new house too. Everyone is different. A paid off mortgage isn't one of my highest priorities.

PSU

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126805 of 127236
Subject: Re: financing the next house Date: 2/7/2014 1:09 PM
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Since I've read a number of your posts over the years and met you in person, I don't have the same concerns as ray. I think it's a fine plan. What is the difference in rate between the 3/1 and 5/1 ARM. If it isn't much, then the interest rate protection ofthe 5/1 may be nice in case your worst case becomes 6 years.

Thanks. I just looked, and the 3/1 is 2.75% where the 5/1 is 2.875%, so that small difference is pittance. Going for the 5/1 would make DH comfortable that we'd have a fixed rate for 5 years, allowing us to take more time to get things done. It works out to be a very cheap insurance policy to go for the 5/1 ARM, so I think that would make more sense for us.

As for what you do when you finally build your new house and sell your old house, I would analyze your choices at that time for what you do with the proceeds from the old house rather than automatically making the decision to pay off the new house too. Everyone is different. A paid off mortgage isn't one of my highest priorities.

I will do that, but DH and I both do like the idea of having the mortgage paid off. This one may come down to the sleep-at-night factor, or just that DH is more conservative in that regard than I am and would prefer the mortgage to be paid, where I would be inclined to rethink it later and decide based on the numbers. Either way, it's not a decision I have to make until we get to that point, but as you know, I need to have a plan, even though the plan may keep getting updated. That's what helps me to sleep at night.

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126806 of 127236
Subject: Re: financing the next house Date: 2/7/2014 2:05 PM
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If it isn't much, then the interest rate protection ofthe 5/1 may be nice in case your worst case becomes 6 years.

Depends on the terms of the ARM. There are 2/2/5 ARMs and 5/2/5 ARMs. If the OP thinks rates will shoot up, he's better off getting a 2/2/5 ARM that limits the increase on the first Change Date to 2%.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126807 of 127236
Subject: Re: financing the next house Date: 2/7/2014 3:00 PM
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Depends on the terms of the ARM. There are 2/2/5 ARMs and 5/2/5 ARMs. If the OP thinks rates will shoot up, he's better off getting a 2/2/5 ARM that limits the increase on the first Change Date to 2%.

Both programs through my credit union are comparable. The 3/1 has 2/2/6 caps, and the 5/1 has 2/2/5 caps. And now that you mention that this could have had a bigger increase in the first year, I see that that is how the 7 and 10 year ARMs are structured. I hadn't noticed that because I wasn't looking at terms that long, and the 2/2/5 caps are what I have seen for most programs, and similar to the last ARM that we had many years ago. Nice point, though, and it made me go back and look, so thanks.

I hadn't considered that the difference was so little, but the 5/1 looks better for us so that DH is not so worried that the rate will go up in 3 years. This way, we have more time before we have to move or sell the house prior to a rate increase, although we can still afford it even at the higher rate.

I really think this is the way for us to go to reduce our risk because the payments will be about 1/3 of what they are now, and it won't really change our timetable. DH and I will talk about it more this weekend.

Anything else that folks can think of to be considered? Any other suggestions on accomplishing my goal?

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126808 of 127236
Subject: Re: financing the next house Date: 2/7/2014 3:31 PM
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I just looked, and the 3/1 is 2.75% where the 5/1 is 2.875%, so that small difference is pittance.

Cole Taylor Mortgage (wholesale) is offering 2/2/5 5-year ARM at 2.5% today.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126809 of 127236
Subject: Re: financing the next house Date: 2/7/2014 5:45 PM
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So how would you do it? Sounds like you would sell the existing house first, move some place else temporarily, and then build.
Yup. That's what we did. Twice.
The last time, we lived in a 2 BR apartment for 9 months with 3 (small) dogs. Fun? No. But we had the safety of KNOWING for a fact that no matter what happened, we'd not get stuck with 2 mortgage payments or 2 houses.


I don't want to do that, and seem to have found a proposal that accomplishes my goal, is affordable for the long term, and doesn't leave us broke or more stressed.
Well, to me it was more a matter of risk-management than wanting the least disruption to our lives. I don't believe in taking a risk unless there is a significant profit to be made by taking on that risk. Taking a risk for trivial gain doesn't make sense to me.

I've never met you nor talked to you, and have no idea about your personal financial situation. I do have personal knowledge of several people who got caught in the middle and had their plans fall thru and got stuck with 2 houses & 2 mortgage payments.

Have you ran any "what if the SHTF" scenarios? What if you your old house doesn't sell for a couple of years? What if you have to drop the price by 20% to get it to sell?

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126810 of 127236
Subject: Re: financing the next house Date: 2/7/2014 5:47 PM
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Your 5/1 at 2.875% is where I would go(but I suspect you know that). You could mention to DH that in my recent past the only thing ARMs have done is go down - both the interest rate and the payment. I'm going with one for my new place as well - I'm believing the stats on how long people keep mortgages and in 30 years, I'll be pretty old and doubt I will be living in the same place.

On the pay off thing, again we've talked about it. I lean toward knowing I could pay it off at any time but I would be unlikely to with any rate not over 5%. It made me feel more nimble in particularly bad life times. Consider a segregated account that auto pays the mortgage ?

You are a bit of in the same position as me that I view as the puzzle with the missing piece where you put letters or numbers in order. Starting to move the pieces around to get where I want to be. Good luck on yours.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126811 of 127236
Subject: Re: financing the next house Date: 2/7/2014 5:58 PM
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Have you ran any "what if the SHTF" scenarios? What if you your old house doesn't sell for a couple of years? What if you have to drop the price by 20% to get it to sell

Yes, I think I have looked at these, but certainly would not mind another set of eyes to see what I might have missed. The new house will cost about half of what the existing house is expected to sell for. That said, if the existing house sells for what we expect, there will be a 60% profit on it from what we paid for it, so having to sell it for 20% less than our expectations will not cause financial ruin. Based on the assumed selling price, we have 88% equity in this house, so it's not like we'd have to bring money to the table, even if we needed to cut the selling price by 20%.

If we refinance this house as I have proposed, and then take out a construction loan/mortgage on the new house that is 80% of its expected cost, and we end up carrying both houses for some amount of time with mortgages on each, we will have a 30% debt ratio. With our investments, we could still afford both houses even if we have both retired and are just living on our portfolio, although we would have to cut back on some discretionary expenses.

I do believe I have covered the bases, and it does seem to me that cutting this mortgage by 2/3 so that we have some financial breathing room while we build the new house is a good thing to do. I can put those extra dollars into the land acquisition/house construction fund so that we have more working capital available.

And before you start saying that our construction costs will overrun our budget, I will note that DH was the general contractor on this house, which came in 2% over our budget, but that included significant upgrades that we opted to do along the way because we had room in the budget. It was a couple of years after that when he finally got his construction supervisor's license, and now is a General Contractor as his occupation, so I am fairly confident that we will build within 5% of our budget.

Really, I think I've thought this through, and I think this is the right path for us, even given the various risks.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126812 of 127236
Subject: Re: financing the next house Date: 2/7/2014 6:32 PM
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. With our investments, we could still afford both houses even if we have both retired and are just living on our portfolio, although we would have to cut back on some discretionary expenses.

I do believe I have covered the bases


Sounds like you have.

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Author: crackdclaw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126813 of 127236
Subject: Re: financing the next house Date: 2/10/2014 6:29 PM
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2gifts,

I think you're on the right track, I agree with your strategy of obtaining funds for the land acquisition of the new construction by tapping into the equity of your current home.

I am thinking that this would avoid taking out the HELOC, where I would be paying interest on the money while it just sits in the bank,

I'm confused by this statement because it's just the opposite. A HELOC provides a line of credit, you draw money as you need to use it, you pay interest only on funds that are drawn. Not sure why you would be paying interest on money that was still available as a line, but not yet drawn? The strategy of a 3YR or 5YR ARM is one where you will be paying interest on money that's just sitting in the bank. On the ARM, you plan to take a loan large enough to retire the current loan balance and provide funds for the land purchase. Until you purchase the land, you're paying interest on money that you have parked. I don't think that's too expensive of a proposition to forego the ARM strategy, just confused by your statement. My own comfort level would be the ARM vs. HELOC due to the fixed rate, even with paying interest on borrowed money sitting in the bank. But there are many on these boards who would run spread sheets to analyze interest costs on parked money, what ifs on HELOC and rising interest rates, etc.

Another point worth considering, or to plan for, may arise at time of application for this new loan. The credit union will likely ask for a letter of explanation on the purpose of the cash out. If you state that the cash out proceeds will be used to purchase land for construction of a new home they may have an issue with considering your current home the "primary residence". Of course you intend to continue living there for 2 to 5 years, but you are also stating that you are planning to move. May be an issue, you may want to consider having a hypothetical conversation with the Loan Officer on the statement regarding purpose of cash out. I've heard horror stories on the tiniest detail tripping up a slam dunk loan.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126814 of 127236
Subject: Re: financing the next house Date: 2/10/2014 8:27 PM
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I'm confused by this statement because it's just the opposite. A HELOC provides a line of credit, you draw money as you need to use it, you pay interest only on funds that are drawn. Not sure why you would be paying interest on money that was still available as a line, but not yet drawn? The strategy of a 3YR or 5YR ARM is one where you will be paying interest on money that's just sitting in the bank. On the ARM, you plan to take a loan large enough to retire the current loan balance and provide funds for the land purchase. Until you purchase the land, you're paying interest on money that you have parked. I don't think that's too expensive of a proposition to forego the ARM strategy, just confused by your statement. My own comfort level would be the ARM vs. HELOC due to the fixed rate, even with paying interest on borrowed money sitting in the bank. But there are many on these boards who would run spread sheets to analyze interest costs on parked money, what ifs on HELOC and rising interest rates, etc.

I am refinancing the current house, and changing from a 10-year FRM to a 5-year ARM, which is based on a 30-year amortization table. That will reduce my payments on this house by 2/3. So I am not taking out an HELOC on this house. I will then just use the difference between the new payment and my current payment to add to our land acquisition and construction funds. This will free up my cash flow, and make it much easier financially if I end up carrying the current house, with the new refinanced mortgage, and the new house with its mortgage for any length of time.

I have enough cash now to buy the land, and then will take some time to do the house plans, and then we will get a construction loan on the new house.

Another point worth considering, or to plan for, may arise at time of application for this new loan. The credit union will likely ask for a letter of explanation on the purpose of the cash out. If you state that the cash out proceeds will be used to purchase land for construction of a new home they may have an issue with considering your current home the "primary residence". Of course you intend to continue living there for 2 to 5 years, but you are also stating that you are planning to move. May be an issue, you may want to consider having a hypothetical conversation with the Loan Officer on the statement regarding purpose of cash out. I've heard horror stories on the tiniest detail tripping up a slam dunk loan.

I'm not doing a cash-out refi. I'm just refinancing the existing balance. That said, I've done a cash-out refinance before to use the proceeds to buy a house (with this same credit union), and they were fine with the money being used to purchase a new house.

I think I've got a good plan at this point, and just did the online paperwork tonight to do the refinance. I already have the approval, contingent on us providing the standard paperwork like paystubs and taxes, and will get that to them tomorrow.

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Author: crackdclaw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126815 of 127236
Subject: Re: financing the next house Date: 2/11/2014 3:32 PM
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I'm not doing a cash-out refi. I'm just refinancing the existing balance.

Got it. I went a different direction based on the initial post on this thread, but understand the benefits of moving from your current 10YR Term into a 30YR amortization (along with a lower rate).

Have fun with the land search and deciding on home design. Fun project!

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126816 of 127236
Subject: Re: financing the next house Date: 2/11/2014 3:54 PM
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I went a different direction based on the initial post on this thread,

That's because I started in one place, and ended up in a different place, so it was certainly easy to get there.

Have fun with the land search and deciding on home design. Fun project!

We've already started listing the house requirements. I had a requirements doc for this house, and will do something similar for the next house. And I have a very detailed spreadsheet that we will use to track our construction costs as we go through the process.

It should be easier and less painful this time because DH will only have one job - to get the house built. With the current house, he used to work all day at his full time job, then come home and work all night on the house, so he had 2 full time jobs. We won't have that problem this time, and his time will most definitely be better spent on our project than on working for others.

And at the end, we will have exactly what we want. Given how picky we are, that is no small feat, but we did it once, so we can do it again.

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126817 of 127236
Subject: Re: financing the next house Date: 2/15/2014 10:28 AM
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An even cheaper loan is the 1 month LIBOR ARM, which rate is currently 1.75. (There are no HELOCs this low.) If you're interested, respond to me off-board and I'll try to hook you up. I don't offer this loan personally.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126818 of 127236
Subject: Re: financing the next house Date: 2/15/2014 6:13 PM
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An even cheaper loan is the 1 month LIBOR ARM, which rate is currently 1.75. (There are no HELOCs this low.) If you're interested, respond to me off-board and I'll try to hook you up. I don't offer this loan personally.

Thanks for the offer, but a 1-month ARM would make DH crazy. As it is, we opted to go with the 5/1 ARM at 1/8 point higher than the 3/1 ARM because DH wants to have a fixed rate for a full 5 years, which should be at the outside of our window here.

It's all in process now, and we have already been approved pending income verification (provided) and the appraisal (scheduled for Thursday).

Now, we just have to find a suitable piece of land, and I am hopeful we can do that within a year.

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126819 of 127236
Subject: Re: financing the next house Date: 2/16/2014 5:09 PM
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Thanks for the offer, but a 1-month ARM would make DH crazy.

I can understand that, but for the benefit of other readers...since the 1-month LIBOR ARM recasts each month, more of the fully amortized payment is going toward principal than would the fully amortized payment for a 5/1 ARM, thereby making the 1-month LIBOR ARM as stable as a 5-year ARM and saves interest, too.

Example:

$750,000 loan amount

Conventional jumbo 30-year fixed rate: 4.30%
Payment: 3711.54
Interest: 2687.50
Principle: 1024.04
Balance after 5 years: 674067

1 month LIBOR ARM: 1.75% amortized over 25 years
Payment: 3088.42
Interest: 1093.75
Principle: 1994.67
Balance after 5 years: 617430

674067 minus 617430 = $56,637 difference!

A 30-year loan takes until Year 9 and 4 months to get to this point. Most homeowners refinance or move during this period; meaning, they just gave away $57,000 in equity and paid $95,000 over 5 years in additional interest charges.

(2687-1093 = 1594 * 60 months = 95640)

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126820 of 127236
Subject: Re: financing the next house Date: 2/16/2014 6:01 PM
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As long as you are giving details, how do the limits work on the 1-month ARM? I imagine there must be caps of some sort. Are they monthly caps, or annual caps? Is there a lifetime cap?

Since you're willing to give the details for others who may be interested, I'd like to see some of the basics.

What's the payment per thousand on this loan? That's something I could easily compare to other loans to get a feel for the difference as well.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126821 of 127236
Subject: Re: financing the next house Date: 2/16/2014 6:25 PM
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CCinOC: "I can understand that, but for the benefit of other readers...since the 1-month LIBOR ARM recasts each month, more of the fully amortized payment is going toward principal than would the fully amortized payment for a 5/1 ARM, thereby making the 1-month LIBOR ARM as stable as a 5-year ARM and saves interest, too.

Example:

$750,000 loan amount

Conventional jumbo 30-year fixed rate: 4.30%
Payment: 3711.54
Interest: 2687.50
Principle: 1024.04
Balance after 5 years: 674067

1 month LIBOR ARM: 1.75% amortized over 25 years
Payment: 3088.42
Interest: 1093.75
Principle: 1994.67
Balance after 5 years: 617430

674067 minus 617430 = $56,637 difference!"


You are using two different amortization periods, as a result, I do not believe that the comparison is apples to apples.

Regards, JAFO

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Author: LLRinCO Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126822 of 127236
Subject: Re: financing the next house Date: 2/16/2014 7:51 PM
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$750,000 loan amount

Conventional jumbo 30-year fixed rate: 4.30%
Payment: 3711.54
Interest: 2687.50
Principle: 1024.04
Balance after 5 years: 674067



If you are paying $1,024 to principle, after 5 years total paid is $61,440 so $750,000 minus $61,440 is $688,560 not $674,067

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126823 of 127236
Subject: Re: financing the next house Date: 2/16/2014 9:04 PM
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the 1-month LIBOR ARM recasts each month, more of the fully amortized payment is going toward principal than would the fully amortized payment for a 5/1 ARM, thereby making the 1-month LIBOR ARM as stable as a 5-year ARM and saves interest, too.

And here I was thinking that CC was quite risk-averse, based on discussions on another board.

Some quick googling says that 1-mo LIBOR ARMs typically have a 1% cap (per MONTH!) and a lifetime cap of 6%.

Current Libor is 0.16%, so the margin would seem to be 1.6%.

This site has historical 1-mo LIBOR rates: http://mortgage-x.com/x/indexes.asp. While LIBOR has been below 0.5% for the past few years, it historically has jumped around a lot. Dec'07 was 5.04% but Dec'08 was 1.12%. But it can jump *up* quickly as well. In fact, Jan'04 was 1.1% but Jan'05 was 2.6%.

With 1.6% margin and a $750K loan the interest would be $1687 at 1.1% LIBOR and $2625 at 2.6% LIBOR. That's a pretty big jump in payment.

Indeed, at the current 1.75% rate, the payment is $1094 interest + $1995 prin = $3089
But a mere 3% jump in the rate, and the payment would be $2970 interest + 1995 prin = $4965.

Luckily the lifetime cap would be 7.75%. Not completely outrageous, but a heck of a lot higher than 4.30%.

the 1-month LIBOR ARM as stable as a 5-year ARM
Completely false. The 1-mo LIBOR ARM resets every month, including the first month. The 5/1 ARM only resets once a year, but not at all for the first 5 years.

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126824 of 127236
Subject: Re: financing the next house Date: 2/17/2014 12:09 AM
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As long as you are giving details, how do the limits work on the 1-month ARM? I imagine there must be caps of some sort. Are they monthly caps, or annual caps? Is there a lifetime cap?

No limits. No caps.

Since you're willing to give the details for others who may be interested, I'd like to see some of the basics. What's the payment per thousand on this loan? That's something I could easily compare to other loans to get a feel for the difference as well.

$1.75 per thousand interest only.

$4.12 per thousand fully amortized over 25 years.


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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126825 of 127236
Subject: Re: financing the next house Date: 2/17/2014 12:11 AM
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And here I was thinking that CC was quite risk-averse, based on discussions on another board.

What's that got to do with explaining a loan program to those who may not be risk-averse? This program is very popular with $1 million+ loan amounts. Do you think I discuss loan programs that only I approve of?

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126826 of 127236
Subject: Re: financing the next house Date: 2/17/2014 12:18 AM
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You are using two different amortization periods, as a result, I do not believe that the comparison is apples to apples.

Feel free to amortize the long term fixed rate over any term you wish. The practical reality is that 1.75% is some cheap money if one can tolerate the risk.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126827 of 127236
Subject: Re: financing the next house Date: 2/17/2014 8:16 AM
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Thanks for the details. I was not sure how these worked.

No limits. No caps.

That would make DH insane, so there's no way we'd ever do one of these.

$1.75 per thousand interest only.

$4.12 per thousand fully amortized over 25 years.


I probably just don't understand how this is calculated, but I'm paying $4.15 per thousand on the fully amortized over 30 years 5/1 ARM that we are refinancing to, so I'm not actually seeing much advantage to using this one, at least in our case.

I do like learning about the various products, however, as you never know when a different product will be more suitable for reaching a particular goal.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126828 of 127236
Subject: Re: financing the next house Date: 2/17/2014 11:44 AM
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Are they monthly caps, or annual caps? Is there a lifetime cap?
No limits. No caps.

No, no, no....

The program being referenced is serviced by Merrill Lynch Wealth Management, and funded by one of three sources (currently);
PHH Bank
Bank of America
Merrill Lynch portfolio

Its interest-only for 10 years, then amortized 15 years.
Its adjustable on monthly periods, with a lifetime cap of 12%, and periodic caps of 5%.

Max loan amount is 80% of appraised value, and max debt/income ratios are 50%, back end (housing plus consumer debt.)

Who is it good for?
Savers who already have a decent head start on accumulating their positive net worth, and who are financially aware that 'rates are relative' and rising rates have roughly parallel affects to both their outstanding leverage (mortgages) and their growth assets.

The working advantage between a 1.75% interest only loan, versus anything amortized, and either 30 FRM rates in the mid-to-high 4%s, or shorter FRMs with even heavier amortization burdens, is significant.

If someone had little to no working capital, but decent income and an aggressive saver mentality, then this program would be a moderate to low risk strategy to maximize savings when it counts.

For anyone who either has significant savings working already, and/or enough economic awareness to expect interest rates to be trapped in the deeply low range for years to come... this is a very low risk, high reward trade.

Cheers,
Dave Donhoff
Leverage Planner

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Author: CCinOC Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 126829 of 127236
Subject: Re: financing the next house Date: 2/17/2014 4:45 PM
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Thanks, Dave.

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