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December 4, 2008
Low Interest Rates Are Teasing Me
I bought a 2-fam brownstone a couple of years ago hoping to get it renovated in my spare time with my spare cash, doing the work mostly by myself, and one day have a tenant.
This strategy has kind of worked. Things are getting done. Slowly. But now I notice that home equity loans are available at amazing rates. My bank is offering a home-equity loan for 3.99%!
I could, at this point, take out a loan for like 60K and finish up this process in a few months, and get a tenant, and pay the loan with the rent on the little apartment in five years. At the same time, with the renovation done, it might be possible to get an appraiser in and maybe get the original mortgage refinanced
(I have noticed that rates have fallen sharply for mortgages as well)
And save a little there too.
It all makes sense, except that I am allergic to debt. The mortgage is the only debt I have, and I am very serious about not living beyond my means. The idea of taking on a loan at a time when the nation is having a debt hangover galls me, and I can't figure out whether my feelings about this are rational or not.
On one hand, I see exactly how I am going to pay the money back, and see the monetary benefits that come from getting the work finished quickly, as well as the personal benefits. It would be great to go ride bikes or see a movie on the weekend instead of build walls.
On the other, I see that I could just finish the work over the next two years by myself and save about 40 grand that never gets paid to anyone, and not invite this kind of risk into my life.
Advice?
Comments
I would just chill and don't refinance.
Posted by: werner at December 4, 2008 11:19 PM
Debt has a purpose.
If you have a plan to manage your debt, it sounds like a reasonable plan to me.
The only issue is whether you'll be able to rent the apt. in a crappy economy.
By all means, be conservative, but dont be allergic to debt. As it turns out, it seems like the most profitable answer was to overextend on a mortgage you couldnt afford and then let the govt and banks reduce the loan.
Posted by: slick at December 5, 2008 3:11 AM
It sounds like you've got a great handle on the financial end of things. If that's the case then, to my mind, the real question is, how much do you enjoy doing the renovation work on your own house? There must be some pleasure/sense of accomplishment in that. I didn't do the actual work on my house but I GC'd it while working full time and was very busy within the scope of that. While it was going on (it took a year) I thought I was going to have a nervous breakdown. But now that the reno is almost over, and being a project person, I'm kinda lost. Go figure. I mean, I can do more now (within reason, the budget's pretty tight) but when I go to the movies it feels like I'm totally slacking off. So hmmm, do I enjoy my free time? Sometimes...
Anyway, if you do hand the reno over most contractors won't do the work with your level of care and attention to detail, which can be crazy making in and of itself. This advice is more than a little obvious but take your time -- lots of it -- finding the right people.
The other thing is, I think this financial crisis has everyone thinking a lot differently about traditional savings and "worst case scenarios" so, if you do take the loan, the question is just how big is the financial risk for you? There's always some. From what you've described the risk really doesn't sound that great but, just for the sake of argument, what would happen if you got sick/lost your job, etc? 60 grand can go a long long way, especially if you don't have to pay it back!
Posted by: herkimermaid at December 5, 2008 10:13 AM
Don't get tricked, there is no way your bank is giving you an APR of 3.99%. Do your calculations again when you find out what the real APR is.
I like the idea though. I have done it myself a couple of times.
Posted by: Aussie at December 5, 2008 11:01 AM
what do you mean real apr?
Posted by: muffala at December 5, 2008 11:06 AM
Depending upon the size of your mortgage, your current rate, and the availability of comps, I would consider a refi with a takeout. Look around for true comps (print out comps from zillow, then walk around and look at the houses to see if those most like yours have sold for a sufficiently high price). If you can keep your loan under 80% of expected appraisal value, you should be able to refi. If the drop in rates from your current rate is large enough, you may be able to take out some or all of the $60k by adding it to the principle for the refi without raising your monthly payments from where they are now. You need to get your numbers and do the math to see if it works, however.
Posted by: slopefarm at December 5, 2008 11:33 AM
Effective APR (annual percentage rate) includes the fees etc. Some banks advertise low rates but are able to give them to you because they charge other fees. The effective APR, if they will give it to you, includes points and other fees and will be higher. But it is your "real" rate. It will allow you to compare that loan rate to another one that does not have the same points and fees. It levels the field so to speak.
Posted by: Aussie at December 5, 2008 11:35 AM
I can't refi right now, my house won't do well in an appraisal. I am in a neighborhood that's got a lot of foreclosures, for one thing, and well, it's in the middle of getting a lot of work done.
Posted by: muffala at December 5, 2008 11:57 AM
That rate could be realistic, if it's tied to a floating rate like prime, etc.
That means it will go up if interest rates go up again.
Seems like a safe way to go, but compute the payment if the rate went up to, say, 8%.
Posted by: oe at December 5, 2008 12:16 PM
If your house won't do well in an appraisal, you will have the same problem with a HELOC. The lender will still be looking at loan to value. Although if you go on one of the sites, like zillow, and get your estimated value, and that value is much higher than what you think an appraiser would give you with a site visit, a HELOC is worth trying because some banks will go the computer data route first for an appraisal on a HELOC and only have you pay for an appraiser if the loan to value requirement isn't met.
Posted by: slopefarm at December 5, 2008 12:27 PM
Who is the lender Muffala?
Posted by: Aussie at December 5, 2008 1:48 PM
schwab
Posted by: muffala at December 5, 2008 2:11 PM
I would do a cash out refinance as opposed to a heloc. We are about to see historic lows on fixed rate mortgages. There is talk of rates as low as 4.5% HELOC are adjustable and for the difference in rate I wouldn't even consider it.
Posted by: Adam Dahill at December 5, 2008 3:05 PM
Zillow is pretty worthless unless your valuing a new cookie-cutter subdivision house outside Phoenix. Zillow does not know the condition of your home, condition of the comps, or if there is a crackhouse across the street.
Posted by: Suburbandude at December 5, 2008 4:00 PM
You say theres foreclosures all around you and you're thinking about dropping more money via a loan? Are you crazy and/or stupid?
Posted by: cornerbodega at December 5, 2008 6:07 PM
S'dude,
I never suggested that zillow is reliable for valuation. It generates a list of comps and you try to gauge which ones are most apt. But when we took out a HELOC last year, several banks came up with their own appraisal values without sending out anyone for an appraisal. They seem to use computer models similar to what zillow does and if the number is sufficient, they will take it as the appraisal. Seems crazy but that's what we found.
Posted by: slopefarm at December 5, 2008 10:03 PM
How long do you honestly believe interest rates are going to stay low? Last I heard was that it was the low interest rates that got us into this housing bubble. So try renting it out as is and get income, As soon as the economy starts getting better and I say that is not any time soon, interest rates will start going up dramatically to stop inflation
Posted by: hannible at December 7, 2008 1:25 AM
Muffala -
The rate for the HELOC is realistic. I currently have mine at prime - 1.01% or 2.99% with BofA. The rate was so good that I paid off the mortgage with the HELOC but I'm protected from downside risk. I had paid off most of the mortgage before it was about to reset and I can afford the pay off the balance if rates spike (I don't believe rates will spike since the nat'l banks for most countries are currently lowering rates).
As for your situation, I would not take out the HELOC. Your payback is 6 years on the loan with a tenant but you believe that if you do the work yourself, you can have it finished in two years anyway. You save $40K by doing the work yourself. Payback on the $20K you do spend will be a lot less than the remaining 4 years. Economically, you're better off with the sweat equity.
From a peace of mind perspective, you're better off with sweat equity. No debt, fewer worries.
Given that you have a number of foreclosures in your area driving down valuations, it makes a lot of sense not to increase the investment in your home with another loan.
Best of luck
Posted by: Ozymandius at December 7, 2008 4:00 PM
better you switch over to another equity.
http://equity.talkingfinancing.com/
Posted by: talkloan at January 23, 2009 5:49 AM
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