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Old 04-10-2009, 10:11 PM
 
1 posts, read 1,730 times
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Mr. Smith wants to build a new house in a southern state. He lives in the north where he owns his current home free and clear, has an excellent credit score, no debt, very stable income, but not much cash. He does not want to sell his old house first.

The new construction will cost $400K. He can pay 20% down, and get a 30 yr. fixed mortgage at 5% or better, with no pre-payment penalty. He then plans to sell his old home for $250K within six months. Within a year or sooner, he hopes to prepay in full the new construction mortgage.

Does this make sense?
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Old 04-11-2009, 05:36 AM
 
Location: Vermont
5,439 posts, read 14,327,150 times
Reputation: 2609
It makes plenty of sense to me. Enjoy your new home.
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Old 04-11-2009, 11:58 AM
 
Location: San Jose (Willow Glen)
180 posts, read 626,630 times
Reputation: 96
sounds fine Mr. 'Smith'.
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Old 04-11-2009, 12:00 PM
 
Location: San Jose (Willow Glen)
180 posts, read 626,630 times
Reputation: 96
Quote:
Originally Posted by 1dos3 View Post
Mr. Smith wants to build a new house in a southern state. He lives in the north where he owns his current home free and clear, has an excellent credit score, no debt, very stable income, but not much cash. He does not want to sell his old house first.

The new construction will cost $400K. He can pay 20% down, and get a 30 yr. fixed mortgage at 5% or better, with no pre-payment penalty. He then plans to sell his old home for $250K within six months. Within a year or sooner, he hopes to prepay in full the new construction mortgage.

Does this make sense?
be sure to get a no point no fee mortgage. should be around low 5's right now.
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Old 04-13-2009, 12:46 PM
 
983 posts, read 3,483,594 times
Reputation: 357
Quote:
Originally Posted by 1dos3 View Post
Mr. Smith wants to build a new house in a southern state. He lives in the north where he owns his current home free and clear, has an excellent credit score, no debt, very stable income, but not much cash. He does not want to sell his old house first.

The new construction will cost $400K. He can pay 20% down, and get a 30 yr. fixed mortgage at 5% or better, with no pre-payment penalty. He then plans to sell his old home for $250K within six months. Within a year or sooner, he hopes to prepay in full the new construction mortgage.

Does this make sense?
It's possible. But Mr. Smith will be paying a lot in closing cost just to borrow for 1 year. Even with 0 point loan, there may be certain items that increase with the loan amount. If Mr. Smith is planning to pay off the debt in 1 year, he may as well wait for 1 year and buy with no debt. Or get a real 0 point loan.

To see how big this affects Mr. Smith, try to calculate the APR assuming the loan matures in 1 year. I think it will be several percentage higher than the rate or the APR for a 30-yr loan.

Here's an example.

$100k 5% 30-yr FRM with 2k lender closing cost.

APR = 5.1784% (assuming the loan lasts for 30 years)
APR = 7.091% (assuming loan paid off in 1 year)
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Old 04-13-2009, 12:56 PM
 
Location: Martinsville, NJ
6,159 posts, read 10,893,123 times
Reputation: 3939
Quote:
Originally Posted by 1dos3 View Post
Mr. Smith wants to build a new house in a southern state. He lives in the north where he owns his current home free and clear, has an excellent credit score, no debt, very stable income, but not much cash. He does not want to sell his old house first.

The new construction will cost $400K. He can pay 20% down, and get a 30 yr. fixed mortgage at 5% or better, with no pre-payment penalty. He then plans to sell his old home for $250K within six months. Within a year or sooner, he hopes to prepay in full the new construction mortgage.

Does this make sense?
Mostly, it makes sense. BUt I'm curious about the financial surity. If he has no cash, does that mean he spends all his income every month? And if that's the case, how certain is he of his ability to make the monthy mortgage payment on the new place, even just for a year? If he is sure he is going to pay it off in a year, or in a few years, (since he is going to have to sell the existing place, how sure can he really be?) he might want to look for a shorter term loan, as they are going to have lower interest rates. If he is "hopeful" of paying ot off in a year, he needs to evaluate the additional cost of the longer term loan, and see if he is willing to pay that additional interest for the safety.
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