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A little Advice Please...


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2009 May 30, 3:42am   1,077 views  5 comments

by Duckhnt   ➕follow (0)   💰tip   ignore  

Its nice to have found a forum full of people that actually can offer some sound advice...So I am going to ask for a few opinions from Patrick and others regarding my current situation please.

My wife and I built a home in Virginia 2 years ago for 680K (does include 6 acres).  We have an interest only 10/1 fixed Jumbo arm at 6.38%.  I put down 20% and owe 585K on the home currently and have 75K in open equity line at 0.00..after all said and done our payment is 3500.  My wife and I both have credit scores above 810.  The jumbo threshold in our area is 456K.  I have talked with our bank about refinancing into a conventional loan at 4.68% which would save me about 1000 in freed up cash per month and about 1500 in intrest per month, refinancing into a jumbo conventional is still in the 6% range.  My concept was to get the conventional at 456K and a second extended out the remaining balance of 130 or so...and work on paying down the second.  Problem is the appraisal came back at 600K and the bank will only do 85% CTLV That means they will only loan up to 510K total.  So it would be a 456 conventional loan with a second at 54K and I would have to drop in the differance in cash which would be 75K.   

I could probably scrounge up the 75K but it would be every bit of my emergency fund/wife stay home to have a baby fund/get in a car wreck fund...every dime available really.  I would also be giving up the open line of credit currently open for the super emergency stuff in order to make it work...but I would be saving 1500 a month in intrest.

I have been thinking hard on this and there are a few options as I see it

1) do nothing, keep my cash liquid and the open equity line open for extra flexibility and keep paying in the current loan configuration. Up side is obviously cash flexibility, down would be wasting intrest and the fact that my arm adjusts in 8 years...which if inflation comes intrest rates will more than likely be higher, even if the appraised value rebounds to the point where I can get a good conventional loan with reduced exposure.

2) Drop the cash and have no reserves and no open cash equity options but reduce my intrest payment into a conventional loan by 1500 a month (1000 free cash as 500 is going to principle in the mortgage payment) and be gaining toward principle as well.  Some say a good hedge against inflation is buying the biggest house you can afford as it's street price will keep up with inflation. Down side is paying into a percieved depreciating asset not knowing whats coming in the next 3 years in the housing market or jobs (wife works for the county, I am in outside sales).

3) Sell the house and land.  The home appraised for 600K, I have talked to a couple realtors who feel that they can get in the 630 range for the home.  I would take a 50K negative equity hit from the initial cash put down when I built, but would still get about 50K from what I currently owe on the house.  Then the concept would be to rent for a while a search for a home in the conventional threshold bracket that is a little smaller to take advantage of those low conventional rates, I could use the positive cash from the sale as the down payment and retain my free cash fund position.  Problem is, how long will it take to sell the home, will I get what is hoped for in price, and in the mean time am I potentially blowing the opportunity to refi at a low rate.  8months down the road rates could go up, I could still have the home, and I loose the option to refi at a low rate.  We are not married to this home, we like it...but we are more concerned in the right financial move than a "house"

4) Max out my current 75K credit line take the cash and walk from it all with the positive equity (nah...just kidding...I would still be liable for the 75K anyway !!  LOL)

I strongly feel that maybe not tomorrow, but within 5 years we will see an inflation and that options 8 years from now will be much more limited than what we have today.  So in my opinon my hand is forced into doing something.  I know I cant stay in this current ARM too long.

What do you all think?  Am I overlooking something ??   Oh, what to do...??

Thanks for any helpful advice.

#housing

Comments 1 - 5 of 5        Search these comments

1   HeadSet   2009 May 30, 10:08am  

I have talked with our bank about refinancing into a conventional loan at 4.68%

This may be moot by now. Last Wednesday's treasury yield and follow on may make your rate 5.5% - 6% at best, since you haven't locked in.

If you can still get the 4.68%, you say you would save $1500 per month plus pay principle faster. Even if you drain you cash getting he lower rate, it seems that $1500/mo could build your cash back up quickly.

2   EastCoastBubbleBoy   2009 May 30, 11:25pm  

2) May still be your best option... even with the higher rates. I'm trying to figure out how, if you put 20% down, you owe 585k.

Try shopping around for the loan. You may be able to find a bank that can work with your current situation., perhaps even finance a slightly higher LTV.

I think opting to sell is not realistic. The associated selling costs would need to be borne by you, and it does not sound that you've factored that in.

Here is another possibility for you: Could you subdivide the land and sell a portion of it? It may be a long shot, but it could be worth looking into.

3   elliemae   2009 May 31, 1:26am  

If you can refi, it's always a good idea to get your fixed costs down. But if you can't, you'll lose a chunk if you sell. Of course, you could lose more if property values go down and you are forced to sell due to an unforeseen event.

Try to keep a cushion if at all possible. I know mine might not be a popular opinion, but one life-altering event (medical bills, disability, new baby, etc) can drastically change your circumstances.

4   Duckhnt   2009 May 31, 10:35pm  

Good point east coast...part of the 20% was built in equity between the cost of the house and the final appraisal going from construction to perm loan. Appraisal came in at 702K which reduced our out of pocket and a loan at 585K...Dont think I will be getting that 4.68 rate this week! Which only further deepenes the question, thanks for the continued opinions. Thanks all!

5   EastCoastBubbleBoy   2009 Jun 4, 12:34pm  

Based on the "wife stay home to have a baby fund" I'll go out an limb and say your are both young (under 35 if I had to guess) and presumably have many working years ahead of you.

If inflation takes hold (and I think it will) then the questions becomes 1) when will that happen and 2) will wages rise accordingly.

It's a gamble, but doing nothing may work out if your smart about the money you're saving. It's hard to give good advice without a full picture of your situation. If you have cash flexibility by doing nothing, you can always aggressively pay down your principle.

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