How big a cushion?
As I’m sure you’re all tired of hearing by now, we’re buying a house. OK. So we have to decide between a construction loan and paying cash for the repairs. The construction loan will cost more in a myriad of ways. But if we pay cash, we will have only $10,000 to $20,000 left over…
As I’m sure you’re all tired of hearing by now, we’re buying a house. OK. So we have to decide between a construction loan and paying cash for the repairs. The construction loan will cost more in a myriad of ways. But if we pay cash, we will have only $10,000 to $20,000 left over for emergencies. Vs. we would have $40,000 left over if we paid way more for a loan. (The loan will cost us $&,000 more a year, among other things.) This is an old house, and there will definitely be some emergency repairs. How big a cushion do you think is reasonable?
Thank you so much, vanburenproud, I really appreciate your detailed answers. I didn’t realize it’s possible to get a HELOC. If we can get one of those, we would never take out the construction loan. We’re assuming (because we’re being conservative) that the value of our property will decrease.
For the others who ask why we are buying now: We’re buying in subprime Brooklyn. Prices are already down 40 percent from peak. We found a rare house we love. We won’t find a house like this again.
The only downside is the location is 15 blocks and one train line from our ideal spot. It’s not that we can’t afford to buy in our ideal location, it’s that we can’t find the right house in our ideal location.
We wound up doing a lot of work ourselves for the first two years, and for some reason we just seemed to get lucky with earning enough cash to cover the costs–2007 was a good year financially for us. So we got the rental apartment mostly done on our own, and then a family member freaked out at how haggard we looked at Christmas and insisted on paying a contractor to come and do the finish work on that donwstairs apartment.
We are now living in that downstairs apartment.
That said, I did take a loan last month to get the upstairs duplex fixed much faster. I got a HELOC at 4%, and am hoping to get everything basically legal and livable, but not fancy, upstairs in time to catch a good deal on a refinance, and have a plan to repay the HELOC in five years with the rental income.
Then we can get back to business-as-usual: buying a couple of doors when we can afford them and installing them on the weekend… doing molding one room at a time, living with a certain degree of project clutter–just utilizing the whole house instead of hiding out on one floor.
I guess what I am saying is that the TED spread is moving steadily downward, you didn’t buy at the height of the market, and so if you’ve already got a mortgage you should be able to get a HELOC later if you need it. I didn’t think we’d be able to get one (we did buy close to the height of the market and surely our house has lost value, loan standards are tightening, we are both self employed, etc.), but it wasn’t a problem. 64K, just like that.
I know that the news regarding loans and the economy in general is scary right now. But the bottom line is that you’re getting a mortgage in this loan market, so you’re going to be OK unless your job feels threatened. But you might not be OK if you find yourself overly saddled with debt, and you might wind up pissing away the loan if you get it right now, because you will have money but you won’t have a plan. The first year of home ownership is a blur of dollars. You sit at the closing table and something inside you snaps, and even if you are a smart, frugal person you go slightly nuts for about a year and spend a lot of money on dumb shit that you would never have spent money on if you were sane. I think it’s dangerous to have a lot of easy money lying around during this time, when the words “it’s only a thousand dollars!” are flying out of your mouth all the time and you are seriously considering things like an otsubo soaking tub and six-hundred dollar toilets and solar electricity retrofits and radiant heat, even though you only make 100K a year.
(That’s my story anyway)
So basically, I would feel good about having $10K stashed if your jobs are fairly solid right now (if they aren’t, then I wouldn’t buy the house at all unless it represents a *serious* decrease in your monthly outlay).
And I would create a mantra for myself around this 10K that involves repeating the fact that you don’t know what you want and won’t for a year, that it’s important to fix emergencies, but that otherwise the first year is all about planning.
Unless you wind up like us, with a slow-motion emergency that costs 100K-at-our-convenience, I can’t imagine having an emergency that costs more than $6K to fix, and if you get a few emergencies in a row that you can’t otherwise resolve, then go get a loan.
Just my two cents. Everyone’s got a different lifestyle. If you are not at all handy and have no desire to become handy, then you should take out the loan. And if you follow my advice, you might wind up living in slight discomfort or disarray for awhile, and if you can’t tolerate that, then you should get the loan immediately.
You know the answer.
Are you crazy buying now? In six months New York City’s real estate will be down at least another 50%. Remember the crisis is just starting to hit New York. Buying with doubt and risk is normal but alot of people the past 10 years bought without fear because of low financing, which by the way is what got us in this terrible housing bubble. In six months you will find new homes going for alot less. Don’t listen to real estate agents and home owners they don’t like to hear that prices are coming down because they are highly invested in real estate and hearing the prices go down makes them feel very stupid.
Vanburenproud, we are also debt averse. I am particularly interested in your comment because I know you ran into unexpected repairs.
I dunno… I think this is a question only you can answer.
I would feel better about not having the loan, myself, but that’s just me. I am particularly debt-averse. I fear banks more than I fear having to scrape together some green, work hard or be very frugal for awhile.
I would never ever buy anything, be it a house, a car, or even a kangaroo, if all I’d have left afterwards was anything less that $100,000.
What are you thinking, dude? This time next year local real estate prices will likely me much much lower.
Don’t buy the house. Keep saving. Find a cheap rental and be smart.
I would never ever buy anything, be it a house, a car, or even a kangaroo, if all I’d have left afterwards was anything less that $100,000.
What are you thinking, dude? This time next year local real estate prices will likely me much much lower.
Don’t buy the house. Keep saving. Find a cheap rental and me smart.
oops forgot some lines in my math:
$2708.33 x 26wks. = $70,416.58/yr.
$5,000 x 12/mo. = $60,000/yr.
$70,416.58 – $60,000 = $10,416.58 (additional off the principle each year)
I agree with Bolder. Keep the cash. In this shaky economy financial experts are saying to have a minimum of 8 months living expenses socked away.
I preface the following by saying please check with your lender as I’m not sure if all loans allow for this but it might be an option for you.
If you find you have extra cash you can set up your payments to get the mortgage paid down quicker. The beauty of doing it this way is in case one of you loses a job or falls on hard financial times you can always revert back to the original (lesser) mortgage payments.
If the monthly mortgage payment is $5,000/mo. (random amount) that’s $60,000 a year right? If you add one extra payment a year AND scheduled your payments bi-weekly instead of monthly you’d knock off an additional $10,416.58 from your principle every year. My napkin math is below.
$5,000/12mo. = $416.66
$5,000 + $416.66 = 5,416.66 (to make the one extra payment a year)
$5,416.66/2 = $2,708.33 (paid bi-weekly)
Using this more aggressive method we will have our 30 yr mortgage paid off in 21 yrs. and saving us just under 100K in interest over the life of the loan(your lender can calculate the savings for you). We always have the option of reverting back to the original monthly payment schedule if we need to which is more manageable on a monthly basis but, more money out of pocket over the long haul.
This way the decision to pay more or less is in your hands not theirs.
Again, not sure if all lenders allow for this without penalty but it might be an option rather than just giving the extra cash to them up front.
Hope this helps.