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Old 06-20-2015, 11:49 AM
 
Location: MID ATLANTIC
7,603 posts, read 17,648,062 times
Reputation: 8099

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Quote:
Originally Posted by AZ Manager View Post
That is your straight cost in interest paid, go nothing no principal reduction and I'm low on that figure. Plus you either owe the $350k at the end of 10 years or you refi and have to put a full mortgage on it then anyway. You are looking at that $120k profit and forgetting you just lost your house when the bank comes to collect in 10 years and the rates are above 8%.

Edit: Sure was off at 2.75% interest only for 10 years your cost is $96k in interest only is and your payment for the next 10 years would be about $3400 a month totaling $408k and a total loan cost of about $504k. Assuming that interest rate doesn't go up, it will. At the terms I gave you before for a 30 year with 20% down your total loan cost (P&I no closing costs) is $512k and you don't have to worry about interest rates going up or losing your home. I wouldn't do a HELOC and it's certainly not how I got to where I am.
I have no reason to doubt your calculations, but you don't take into account his tax position, nor appreciation or our current out of control rental increases, which actually pushed me into buying and anchored me to remain in the DC area for a few years. I agree, use of the primary residence is not ideal, but if he's going to do it, this is the place.
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Old 06-20-2015, 12:10 PM
 
28,384 posts, read 68,011,584 times
Reputation: 18195
Lots of good advice / honest experience! The bottomline still boils down to how much risk the OP is willing to accept and what sorts of potential rewards are likely...

The fact is, as others have said in several different ways, the OP has TONS of exposure to real estate and that is probably a BAD idea for the long term. OP owes money on their primary residence, has essentially TWO second mortgages (which is kind of hard to believe OT1H, but given the wacky / bad record keeping that some lenders have...) and there is a REAL risk that the lender(s) might catch this at some point and do the nasty (but perfectly legal...) letter saying: "WHOOPS, so sorry, this is not allowed, we are shutting down the HELOC effective NOW, give us our money back"! If that means that they then have to decide to liquidate some of their other holdings (and massively reduce their diversification...) or just try to sell the rental ASAP or maybe watch their credit crater if they have to "walk away" those are ALL REALLY BAD choices...

Like E4you, my wife (and even adult kids...) say that I have become Capt. Doom, but the reality is that right now there are lots less risky ways to actually grow one's wealth -- real estate is WORK, and even if you understand that from managing another rental the fact is with less headaches you can find better ways to make more passive investments.

My gut says that the OP sees the "magic HELOC" as a way to get "free money" toward a potential income property. The analysis of that LOAN, as encumbering their PRIMARY RESIDENCE and leaving them with NO REAL WAY to decrease their indebtedness, is something that they overlook at their peril -- real estate values NEVER move in just one direction! The pressures that could very well come from changes in political priorities along with interest rate shifts and unforeseen challenges could mean somebody with too much exposure to real estate could be wiped out!

If the OP can SAVE enough to qualify for a regular mortgage and the value is still there then MAYBE they can revisit this, but for now don't look at the HELOC as anything other than a TRAP...
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Old 06-20-2015, 12:45 PM
 
4,483 posts, read 7,951,431 times
Reputation: 6415
Quote:
Originally Posted by chet everett View Post
and there is a REAL risk that the lender(s) might catch this at some point and do the nasty (but perfectly legal...) letter saying: "WHOOPS, so sorry, this is not allowed, we are shutting down the HELOC effective NOW, give us our money back"!
Yep. I remember the 1980's when stuff like this happened. Bank calls loan...... due in 60 days. don't have the money? Foreclose on home(s). Yep, it happens.
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Old 06-20-2015, 01:39 PM
 
3,483 posts, read 4,624,078 times
Reputation: 2259
Quote:
Originally Posted by chet everett View Post
Lots of good advice / honest experience! The bottomline still boils down to how much risk the OP is willing to accept and what sorts of potential rewards are likely...

The fact is, as others have said in several different ways, the OP has TONS of exposure to real estate and that is probably a BAD idea for the long term. OP owes money on their primary residence, has essentially TWO second mortgages (which is kind of hard to believe OT1H, but given the wacky / bad record keeping that some lenders have...) and there is a REAL risk that the lender(s) might catch this at some point and do the nasty (but perfectly legal...) letter saying: "WHOOPS, so sorry, this is not allowed, we are shutting down the HELOC effective NOW, give us our money back"! If that means that they then have to decide to liquidate some of their other holdings (and massively reduce their diversification...) or just try to sell the rental ASAP or maybe watch their credit crater if they have to "walk away" those are ALL REALLY BAD choices...

Like E4you, my wife (and even adult kids...) say that I have become Capt. Doom, but the reality is that right now there are lots less risky ways to actually grow one's wealth -- real estate is WORK, and even if you understand that from managing another rental the fact is with less headaches you can find better ways to make more passive investments.

My gut says that the OP sees the "magic HELOC" as a way to get "free money" toward a potential income property. The analysis of that LOAN, as encumbering their PRIMARY RESIDENCE and leaving them with NO REAL WAY to decrease their indebtedness, is something that they overlook at their peril -- real estate values NEVER move in just one direction! The pressures that could very well come from changes in political priorities along with interest rate shifts and unforeseen challenges could mean somebody with too much exposure to real estate could be wiped out!

If the OP can SAVE enough to qualify for a regular mortgage and the value is still there then MAYBE they can revisit this, but for now don't look at the HELOC as anything other than a TRAP...
My primary house is paid off.
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Old 06-20-2015, 02:53 PM
 
Location: Phoenix, AZ area
2,936 posts, read 2,402,108 times
Reputation: 3372
Quote:
Originally Posted by Thinking-man View Post
My primary house is paid off.
Everything he said still stands and as soon as you take a HELOC on it then it won't be. Your paid in full asset will become debt and your rental will become paid off, and the bank can peruse both in the event that you default on the HELOC.

This is the thinking that caused 2008 to happen. Everyone was looking at them low rates and mortgaged themselves to oblivion. Then the rates got too high and they couldn't pay it back so everyone got screwed.
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Old 06-20-2015, 06:24 PM
 
16,521 posts, read 17,581,310 times
Reputation: 23640
Quote:
Originally Posted by Thinking-man View Post
My primary house is paid off.

Yeah right now, but you're taking a HELOC thus leveraging a paid for property to purchase another. You're transferring the risk backwards. You transfer the risk on the rental property not your primary residence. If something craps out the bank gets your primary residence since that's what the HELOC is on. And then the rental can be jeopardized because of the loss of primary residence.

I could see leveraging one high cash flow rental to buy another rental since they are both investments.

I don't care for leveraging as you plan because IMO it's a house of cards. At any time you can have a weak card
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Old 06-20-2015, 07:03 PM
 
3,483 posts, read 4,624,078 times
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Quote:
Originally Posted by Electrician4you View Post
Yeah right now, but you're taking a HELOC thus leveraging a paid for property to purchase another. You're transferring the risk backwards. You transfer the risk on the rental property not your primary residence. If something craps out the bank gets your primary residence since that's what the HELOC is on. And then the rental can be jeopardized because of the loss of primary residence.

I could see leveraging one high cash flow rental to buy another rental since they are both investments.

I don't care for leveraging as you plan because IMO it's a house of cards. At any time you can have a weak card
Ok, maybe i'm missing something.....so maybe you or someone else can explain...
I have a paid off 550k house. I get a 400k HELOC on it. I use 350 to buy a rental that's worth 350k. 2 months down the line the interest rate goes up .5 percentage points and I decide to lock it in for a 30 year fixed and switch from the 2.75 variable rate. How will the bank take my house?

even worse (not worst) case scenario, housing craps out, and prices dip 15% overnight. my 350k rental is now worth only 300k. I can sell my rental at a 50k loss, and pay 300k towards my HELOC immediately, and have a 50k balance on the HELOC that i can pay off anytime i want with reserves or stocks i can sell, or just keep a 50k HELOC amount with a very low payment.

what am i missing here?
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Old 06-20-2015, 07:38 PM
 
Location: Phoenix, AZ area
2,936 posts, read 2,402,108 times
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Quote:
Originally Posted by Thinking-man View Post
Ok, maybe i'm missing something.....so maybe you or someone else can explain...
I have a paid off 550k house. I get a 400k HELOC on it. I use 350 to buy a rental that's worth 350k. 2 months down the line the interest rate goes up .5 percentage points and I decide to lock it in for a 30 year fixed and switch from the 2.75 variable rate. How will the bank take my house?

even worse (not worst) case scenario, housing craps out, and prices dip 15% overnight. my 350k rental is now worth only 300k. I can sell my rental at a 50k loss, and pay 300k towards my HELOC immediately, and have a 50k balance on the HELOC that i can pay off anytime i want with reserves or stocks i can sell, or just keep a 50k HELOC amount with a very low payment.

what am i missing here?
Couple of major problems with the biggest being you don't seem to understand closing costs. You buy a house for 350k plus closing costs you are in 370k easily (30k cash left). You sell for 300k minus closing costs, in a down market sellers pay a ton more just to sell and cash out at 260k, I am a little high but close if you are paying all closings and commission. You leave a 110k HELOC on your house which payments are around 800 a month. That's pretty good case scenario for a worse case because if you can't sell it even after that huge of a loss you are out everything.

That's the risk with all investing but you aren't trying to limit the fallout you are risking your entire life's savings. Bye bye that 550k paid off home and bye bye that rental property.
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Old 06-20-2015, 07:57 PM
 
3,483 posts, read 4,624,078 times
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Quote:
Originally Posted by AZ Manager View Post
Couple of major problems with the biggest being you don't seem to understand closing costs. You buy a house for 350k plus closing costs you are in 370k easily (30k cash left). You sell for 300k minus closing costs, in a down market sellers pay a ton more just to sell and cash out at 260k, I am a little high but close if you are paying all closings and commission. You leave a 110k HELOC on your house which payments are around 800 a month. That's pretty good case scenario for a worse case because if you can't sell it even after that huge of a loss you are out everything.

That's the risk with all investing but you aren't trying to limit the fallout you are risking your entire life's savings. Bye bye that 550k paid off home and bye bye that rental property.

No, you don't seem to understand that there isn't 20k worth of closing costs when you're buying with cash. (or a regular mortgage for that matter). I bought my primary house (370k 6 years ago), and i paid 3000 in closing costs total. with a Cash purchase, there's even less closing costs, and 2k of it will be coming from the seller. (in other words, you have no clue what you're talking about in that portion of your response. I've put a source down below (forbes.com) if you're interested in learning more).

secondly, the scenario i described is pretty insane....the chances of housing dropping 15% overnight is slim to none (closer to none). but even if your INSANE-er? scenario is taken at face value, a 110k loss isn't going to mean they'll take my house away....i have enough reserves and other non-liquid investments that can be used to cover that if needed. and the 800 dollars you mentioned is only 7% of my after tax/take home monthly salary, so again, not a HUGE deal.

look, if you want to, one can come up with all sorts of 'scenarios' that could end up in me losing my house. Yes, it's true. it's possible. Nobody (not even me) is denying it. But those scenarios exist even if i don't make this purchase.....(like what? a catastrophe could put me in the hospital the day after I lose my job and insurance....3 days after the market crashes 80%, and our property taxes are overdue....causing our home to be taken away or something crazy like that)

You have to look at the likelihood of these worst case scenarios...housing market dropping 15% overnight....or the HOT northern VA market going to hell over the weekend....etc. etc.

just saying.


Source info:
Closing costs are lower with cash

Cash buyers can also save on closing costs. You don’t have to fork over money to pay a bank attorney for the mortgage. This is an expense that can run $750 and up. You don’t have to put real estate taxes in escrow up front nor pay the estimated $300 to $600 for a mortgage application plus additional thousands in loan origination fees and assorted junk charges. And you aren’t required to cough up $400 to $600 for an appraisal, which mortgage lenders insist upon, or, in a growing number of cases, multiple appraisals.

Another expense that will drop: title insurance, which offers protection against problems with the chain of ownership and preexisting claims like unpaid property taxes or liens placed by stiffed contractors. On a $600,000 house with a 20% down payment, title charges, which include researching local land records, can easily top $2,000. But roughly one-third of that is for coverage that protects only lenders (which, of course, they mandate you get and pay for). Cash-only buyers don’t have lenders, so there’s an immediate savings right there. Indeed, as a cash buyer, it’s up to you whether you want title insurance at all. Realtors say it’s a prudent add-on.


http://www.forbes.com/sites/morganbr...ome-with-cash/

Last edited by Thinking-man; 06-20-2015 at 08:07 PM..
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Old 06-20-2015, 08:53 PM
 
Location: Phoenix, AZ area
2,936 posts, read 2,402,108 times
Reputation: 3372
What would you do with 400k right now?

You got the same answer in both threads and probably more since you have been talking about this on CD for almost a year now. Pull the trigger or follow the advice you seemed to want but argued with all along. I might be high on closing costs because I always budget everything high. If you plan low and come in high you are screwed but if you plan high and come in low you are at a profit, it is how I have what I have at my age. You take home about 140k a year and you want to use your home for less than 3 years of that income to buy an investment property which you could potentially lose everything, good luck with that. Go talk to a money manager they will tell you what you were told here too in several different places by a bunch of people.

I would be more than happy to explain to you how I got to where I am if you want, I haven't held a job outside managing my investments since 2009 all due to my real estate planning which started off with me working my ass off for the first 6 years out of high school.
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