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Old 11-22-2009, 07:54 PM
 
Location: Raleigh, NC
475 posts, read 1,185,780 times
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After months of searching for a new home my husband and I have decided to stay put and add on a family room. We love where we live and we can't see spening an extra 150k just to have a slightly larger home. We've spoken to a contractor and gotten an estimate of about 25-30k do an addition.

We currently have a 30 year FHA loan at 5.8% which runs us about $850 a month. We purchased the home 5 years ago at $116k and have paid down our balance to just under 100k. The home today is worth 160k(even in the current market). We have NO car payments and the only debt we have is $900 on a Lowes card for a new front door last week. We only used the card to keep it open, we will be paying the balance off from money we have set aside as soon as the bill comes.

If it were you where would you start in terms of paying for this? Paying cash is not an option we will have to finance it. We are looking at doing the addition fall of 2010.

PS: We are 28 and 29 years old and put 8% of our income income into my husbands 401k, I am state employee so a portion of my pay is also directed into a state plan, we have no children.
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Old 11-22-2009, 08:46 PM
 
28,450 posts, read 72,408,772 times
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Unless there is something you have not spelled out you are an EXCELLENT candidate to explore a simple refi to take advantage of historically low rates AND then use a HELOC to finance the family room addition.

I would recommend shopping in such a way that you explain BOTH your preference for doing it as I have outlined AS WELL AS your willingness to entertain the thought of a cash out REFI OR taking a new 1st and HELOC at the same time BUT I WOULD CAUTION that you will absolutely NEED to have a good honest lender lay out ALL the pluses and minuses to EACH situation.

As I see it the advantage of doing a REFI right now for just the $100K you owe is that you will get a great rate and not have to worry about too much funny business -- your income, debt, and equity all sound terrific. You should get your credit score to confirm this.

If you do a HELOC right after the REFI you might be able to save some fees if you use the same lender OR the lender from the REFI gives you the appraisal and waives other fees -- not as common as it was a few years ago, but it could not hurt to ask.

I would feel OK trying to get a cash out REFI, but unfortunately not too many lenders feel the same way, as too much of 'em got burned by such "equity piggy bank robbers" in the past year or two ... You also have to factor the term and rate discounts -- HELOC's generally structured to have lower rates than 30 year fixed but balloon out at 10 years. You seem to have record of paying down your principal so that ought not be a problem for you, but for too many other folks... SHAZAAM, they lost it all.

Please SHOP WISELY and have all your details ready as well as the ability to compare all the details from AT LEAST several different SOURCES including a major money center type bank, a credit union, a mortgage broker, and a sub-regional bank. If you have the time and records to do this all in the space of two weeks you should not see your credit score hit multiple times, as the reporting agencies will code the inquires as part of one "shopping period".
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Old 11-23-2009, 10:38 PM
 
Location: California
31,094 posts, read 34,178,235 times
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We did what you are doing and used a HELOC.
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Old 11-23-2009, 10:48 PM
 
3,460 posts, read 5,016,090 times
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Do you have an emergency fund? If not, you should fully fund one before you think about taking on more debt.
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Old 11-24-2009, 04:54 AM
 
20,793 posts, read 54,676,445 times
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I would also refinance as rates are a good point lower than what you are paying now and adding another $30K to that won't change your payment much if any. Getting a HELOC is a great idea, it is also a nice back up to any emergency funds--in the extreme need of the money and everyone should have access to a HELOC if they can be responsible with the funds.

Also, standard thought is 15%, at least, into retirement funds as well as having a years salary in liquid assets, checking, savings, mutual funds, etc.
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Old 11-24-2009, 07:55 AM
 
4,010 posts, read 9,036,881 times
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Quote:
Originally Posted by kickchick2000 View Post
.....
If it were you where would you start in terms of paying for this? Paying cash is not an option we will have to finance it. We are looking at doing the addition fall of 2010.....
I would not refinance the house to tap the extra equity because the goal being is to pay off the loan, not adding more to the balance. In addition you avoid potentially several 1000 dollars in refinance costs.

I would look at the addition in these terms. I would consider waiting until I had enough cash to pay for the addition without a loan. Barring that, I would at least try to save 50%, and using that to get a short term loan to pay for the rest. I would also check into what options there were for doing some of the work myself. (assuming you are handy) You can save an enormous amount by doing your own flooring, painting, etc.

This is what I do since you were asking and I realize that you said that you didn't want to save up for it, but this kind of thinking, IMO, does impose a discipline to get yourself out of debt as soon as possible. Your situation sounds good and while I think adding sq/footage is a sound investment, you should also set a goal to be debt free before you are 40 or earlier if you can.
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Old 11-24-2009, 11:00 AM
 
48,516 posts, read 85,166,320 times
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I agree withlumbolo that you ned to save more towards the additon. loks like if you only bouhgt five years ago that you bought a liitle too small then or actaully planned on a addition.Mke sure to have plans and check with several contrators on the specs listed in those plan and have a contract spelling everyhting out on thise specs.25K in the lowest of cost areas is a pretty small additon really.
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Old 11-24-2009, 12:39 PM
 
20,793 posts, read 54,676,445 times
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Quote:
Originally Posted by lumbollo View Post
I would not refinance the house to tap the extra equity because the goal being is to pay off the loan, not adding more to the balance. In addition you avoid potentially several 1000 dollars in refinance costs.

I would look at the addition in these terms. I would consider waiting until I had enough cash to pay for the addition without a loan. Barring that, I would at least try to save 50%, and using that to get a short term loan to pay for the rest. I would also check into what options there were for doing some of the work myself. (assuming you are handy) You can save an enormous amount by doing your own flooring, painting, etc.

This is what I do since you were asking and I realize that you said that you didn't want to save up for it, but this kind of thinking, IMO, does impose a discipline to get yourself out of debt as soon as possible. Your situation sounds good and while I think adding sq/footage is a sound investment, you should also set a goal to be debt free before you are 40 or earlier if you can.
Not everyone's goal is to pay off their mortgage. If adding a $30K addition nets them out $100K in the long run in equity the money is well spent. If my investments are earning 8% and my mortgage is only at 4.5%, I am going to put money into my investments as socking that into my mortgage is losing money, much the same way putting too much cash into a regular savings account causes you to lose money over time.
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Old 11-24-2009, 01:18 PM
 
4,010 posts, read 9,036,881 times
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Quote:
Originally Posted by golfgal View Post
.... If my investments are earning 8% and my mortgage is only at 4.5%, I am going to put money into my investments as socking that into my mortgage is losing money, much the same way putting too much cash into a regular savings account causes you to lose money over time.
I hear this opinion a great deal as a justification for keeping a mortgage, but keep in mind that in your scenario, you have to take significant risk, and I do mean significant, to normally pull an investment that is 3.5% over the current mortgage rates. This also doesn't include investment costs and taxes. If there was easy 8% money out there, then the banks would be going after it too instead of making 4.5% loans, and they would let the rates rise up to this level and higher. This is why this advice doesn't usually pan out in the long run for most people. if you have gotten it to work for your situation, then I commend you.
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Old 11-24-2009, 08:36 PM
 
20,793 posts, read 54,676,445 times
Reputation: 10559
Quote:
Originally Posted by lumbollo View Post
I hear this opinion a great deal as a justification for keeping a mortgage, but keep in mind that in your scenario, you have to take significant risk, and I do mean significant, to normally pull an investment that is 3.5% over the current mortgage rates. This also doesn't include investment costs and taxes. If there was easy 8% money out there, then the banks would be going after it too instead of making 4.5% loans, and they would let the rates rise up to this level and higher. This is why this advice doesn't usually pan out in the long run for most people. if you have gotten it to work for your situation, then I commend you.
The banks ARE going after that easy 8% money--Bank Owned Life Insurance (BOLI). It is a significant portion of a lot of major bank's investment portfolio--especially those banks that weathered the storm well in the past year. They make the 4.5% loan off the 8% return so THEY make money.
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