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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 127229  
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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