Financial gurus inside please??

[TN94z]

Okay, I have my house for sale at the moment because I want to build a smaller house with more land. I have a lot of equity built up in the house. I also have a lot of debt other than the house that gives me a very close debt to income ratio. I have a friend that works at a bank that can hook me up with a home equity loan. Now my original plan was after selling the house, using some of my profit to pay off everything I owe. Well, there are many things I could do to the house now to really help it sell more quickly but I just don't have the cash at the moment.

Here is my question coupled with an idea that I had. What would be the down side to going ahead and getting the home equity loan and using it to pay off the other debt that I currently have? Then once the house sells, both the house and the equity loan will be paid off and I will be at the same place as I would be had the house sold (but more than likely much more quickly) and I then used the profit to pay off my bills? The reason I am thinking of doing this is because if I get the home equity loan now and pay the bills off, then that would free up the cash I need to put into the house to make it sell more quickly. Is this a stupid idea, good idea, etc...?

[Mr3Putt]

Okay, I have my house for sale at the moment because I want to build a smaller house with more land. I have a lot of equity built up in the house. I also have a lot of debt other than the house that gives me a very close debt to income ratio. I have a friend that works at a bank that can hook me up with a home equity loan. Now my original plan was after selling the house, using some of my profit to pay off everything I owe. Well, there are many things I could do to the house now to really help it sell more quickly but I just don't have the cash at the moment.

On the surface it sounds like a good plan if.......

A. Your equity loan terms are favorable. B. The house sells quickly. C. You don't build up the "other" debt back up in the interim. A loan secured by your home, usually has better terms and is treated better for tax purposes than most other kids of debt. But, the banks just aren't as liberal with equity loans as they used to be. The qualifying is tougher and the terms aren't as user friendly as "back in the day". If you put $XX into the house, will you get $XX out of the property? How much faster will you get out from under the property by improving it? Sometimes it's better to reduce the price to speed up the sale, rather than spending money on improvements and hoping it helps. Every buyer out there today is looking for a deal. And rightly so. Good Luck.

[CarlSpackler]

I agree with M3P. If it were me, I would pay off the debt by tightening my budget and selling off assets (i.e. - garage sale) instead of a HE loan. Make sure you establish a budget and track your expenses to it. Quicken Online is free and works well.

[David in FL]

I like your original plan A.

Any realtor will tell you that the money put into home improvement will not result in an equivalent increase in market value. You'll lose money by making improvements and then immediately selling the house. Remember, there are closing costs associated with most home equity loans too.

Unless the house simply will not sell without the improvements, it won't pass inspection because the roof is falling down as an example, I would sell it first, then immediately pay off as much of the remaining debts as you can while still maintaining enough to allow you to put at least 20% down on the new house to avoid a PMI requirement.

[TN94z]

On the surface it sounds like a good plan if.......

I can get the loan no problem at like 7 or 8%. My friend at the bank has already confirmed this. The loan would not be soley for home improvement. It would be used to pay off other debt that would free up monthly cash that I could use to do needed things around the house.

I like your original plan A.

The loan closing costs are a couple hundred. A refinance, which I would never do because my current rate is too good and it wouldn't make financial sense, has closing costs of a couple of thousand. Another thing I was told by a real estate agent is this: If a buyer sees that a homeowner owes a lot less than they are asking...they will lowball their offer. If a buyer sees that a homeowner owes about the same as they are asking, they tend to get better offers on their house. I have had 2 real estate agents tell me this.

[David in FL]

Another thing I was told by a real estate agent is this: If a buyer sees that a homeowner owes a lot less than they are asking...they will lowball their offer. If a buyer sees that a homeowner owes about the same as they are asking, they tend to get better offers on their house. I have had 2 real estate agents tell me this.

Buyers can offer anything they want. You don't have to accept. As long as the house is priced appropriate to the market, you're fine. The big kicker remains.....you will not get the $'s you put into the house back when you sell it. If you put $20k into the house, you might be lucky to get $5k back in a higher selling price.......in a tough market, maybe not even that. Once you move, that money is lost forever. Factor in what that $20k is worth to you in terms of repaid debt, and the subsequent time value benefit of any investments you would have the ability to make once that debt is repaid, and depending on your age, the difference could be hundreds of thousands of dollars at retirement time. I'll continue to recommend not putting additional $'s into a house that you're intending to sell in the near term. My .02 worth.

[Mr3Putt]

I can get the loan no problem at like 7 or 8%.

It sounds like your mind is already made up, and that's OK.

Get the loan, do the fixes, sell the joint. Ask your agent how a buyer or prospect would know what the seller owes on the house. I've bought a number of shacks/properties etc., any offers were based on my perceived/learned value of the property, regardless of any encumbrances. It would take lots of dues diligence and research to determine owners true equity. What about any loans that aren't recorded (personal, trust, off balance sheet stuff)? Over half the properties getting sold in this economy are "short sales". That means they are sold for LESS than the mortgages owed. Having lots of debt on the property your selling does not put you in a strong negotiating position. Sorry to say this but both of your agent sources are full of .

[Azprobe]

My 2 cents... are there *any* houses selling "quickly" these days?

I agree, sounds like you already made up your mind, but I would have to agree with everyone else... bad idea.

[TN94z]

Buyers can

Not all true. For instance, my upstairs needs to have heating and air installed because I never finished it on the assumption that I would never use it. The heating and air will cost about 4500.00. Okay, without the heating and air, my house sits at 2800 square feet. With the heating and air, it sits at 3600 square feet. That is a big difference price wise...much different than the 4500.oo it would cost to get it installed. The house will almost not sell without it. So to say that you would lose all money that you put into a house that you are about to sell is not entirely accurate.

It sounds like your mind is already made up, and that's OK.

I haven't made my mind up yet. If anything, I am leaning toward not doing it. I have looked at houses to buy before and my agents could find out what is owed....it's not top secret. As far as loans not recorded, that is a different story. Mine is on file so that would not be my situation. I know that most offers are made that way, but if you know someone has a great deal of room to drop the price, then any smart business man is going to start at the bottom. If you know someone has to have the price they are asking because they owe that amount, then there is only so much dealing you can do....make a difference. The agents are far from full of I might agree if I haven't seen it with my own two eyes.

[David in FL]

Not all true. For instance, my upstairs needs to have heating and air installed because I never finished it on the assumption that I would never use it. The heating and air will cost about 4500.00. Okay, without the heating and air, my house sits at 2800 square feet. With the heating and air, it sits at 3600 square feet. That is a big difference price wise...much different than the 4500.oo it would cost to get it installed. The house will almost not sell without it. So to say that you would lose all money that you put into a house that you are about to sell is not entirely accurate.

Interesting situation. You might get the $4500 back out, but I doubt that you'd get a whole lot more. The reason being that if you can put $4500 into it and get an additional 800 sqft, so can a perspective buyer. You might get a little bit more for the "convenience factor" of already having done the work, but then again, in a tough market, I also like the idea of being able to look a buyer in the eye and tell them that they can gain 800 sqft by adding the HVAC themselves at a cost of "only $4500". Maybe even hand them the completed quote...... If your realtor isn't considering that in the valuation of the property, he/she might be underpricing you with respect to the market. Remember, the realtor isn't on your side, no matter how hard they'll try to convince you otherwise. Their only goal is to sell, close, and move on as quickly as possible. They'll gladly give up a couple of bucks to close and move to the next property. A $20,000 reduction in price is only $1000 or so to them but it's $19,000 out of your pocket. Are we having fun yet?

[alf174]

That 7-8% seems high to me but I haven't gotten a new equity loan in 5-6 years; I'm paying about 3% now.

In general I have to agree that most improvements will not increase your house value, however you've stated that the climate control additions will effectively increase your usable square footage. Will your revised asking price be the same as some local comparable of the same size? If yes, then it may be worth the risk. I would really dig deep into some comps to see what the closing prices have been verses the asking prices.

Are you pre-approved for your new property?

[TN94z]

Interesting situation. You might get the $4500 back out, but I doubt that you'd get a whole lot more. The reason being that if

From the people I have talked with that were looking at the house, I was told that the upstairs heating and air was the killer of the deal. If that had been installed they would have made an offer. It has 2 bedrooms, a media room, and bathroom upstairs that can't be considered without this done. I understand your point as well.

That 7-8% seems high to me but I haven't gotten a new equity loan in 5-6 years; I'm paying about 3% now.

That may not be right....that was just an example compared to the 11-20 credit card rates. My asking price is about 40k less than other comprable houses with a lot of room to go lower if an offer is made. My dad is going to give me land and I am going to build another house as we built this one ourselves.

[David in FL]

If that had been installed they would have made an offer. It has 2 bedrooms, a media room, and bathroom upstairs that can't be considered without this done.

My point is that the fact that it's not

done doesn't mean that it has zero value with respect to the property. Had someone told me that, I would have told them to make me an offer and if we come to an agreement, I'll have the work completed, at my expense before closing. I'd also have a penalty clause in the contract if they subsequently failed to close as agreed.

[iacas]

I can get the loan no problem at like 7 or 8%. My friend at the bank has already confirmed this.

7-8%? Someone's getting a good deal there. It isn't you.

[HytrewQasdfg]

My 2 cents worth.

1. The agent is having you put money/improvements into the house so it will sell more quickly at the current (or lower price). You won't get this money back in this economy. Alternativly, you could just lower the price of the house by the amount the improvements would cost you (which would probably make it sell more quickly than the improvements would.)

2. If you could qualify for a 2nd mortgage (which is all a home equity loan is), then you could probably qualify for a refinance. Driving in today, someone was adveristing a 4% rate on first mortgages. The rates have really dropped through the floor. Is it possible you could refinance your 1st mort and other debt into a new 1st mort at a lower rate?

3. HOME EQUITY LOAN??? 2ND MORTGAGE??? ARE YOU NUTS???? (shouting on purpose.) The biggest problem people are having getting out of homes today is the 2nd mortgage. The holders of the 1st mortgage are often willing to finance down to a lower rate, but it can't be done because the holder of the 2nd mortgage won't play ball. If you want to put yourself into a financial straight-jacket, then get a 2nd mortgage (home equity loan.)

I'm also having trouble following your logic, so I've cut it down to what I understand:

1. " getting the home equity loan and using it to pay off the other debt that I currently have?"
2. "once the house sells, both the house and the equity loan will be paid off"
3. "then used the profit to pay off my bills?"

If you are going to use the equity loan to pay of your debt (bills) what bills are you going to pay off with the profit?

I know your dream is a smaller home on more land, but I think your first dream should be to get out of debt (not into more debt.) Take it in phases. Pay off your debt. Sell you house (which will take a while unless you want to give it away.) Get your smaller house.

[TN94z]

My point is that the fact that it's not

I agree with that but on the other hand I have to advertise the house at the smaller square footage, bedrooms, etc....because it has to be heater square feet to be advertised. This in turn makes it look as though my price is comparably too high and that the house is much smaller than it actually is. This affects the amount of people that call about the house and actually feel interested in the house.

7-8%? Someone's getting a good deal there. It isn't you.

Hence my comment above about that interest rate. That rate was just hypothetical. I don't know what interest rate they have as I have not looked that deep into it. All I was told is that I can get the loan no problem.

My 2 cents worth.

The agent hasn't said anything about this. This is my idea coming from comments of the people that have looked at the house. I will lower the price first but many people don't want to mess with any fixing, improving, etc...This isn't a fixer upper. This is a 6 year old very nice house in one of the best neighborhoods in my area.

2. If you could qualify for a 2nd mortgage (which is all a home equity loan is), then you could probably qualify for a refinance. Driving in today, someone was adveristing a 4% rate on first mortgages. The rates have really dropped through the floor. Is it possible you could refinance your 1st mort and other debt into a new 1st mort at a lower rate?

Refinancing is not an option. The rates are going back up now and I have a very low rate already. Not to mention that closing costs on a refinance are a couple of thousand around here as opposed to a couple of hundred on the home equity loan.

3. HOME EQUITY LOAN??? 2ND MORTGAGE??? ARE YOU NUTS???? (shouting on purpose.) The biggest problem people are having getting out of homes today is the 2nd mortgage. The holders of the 1st mortgage are often willing to finance down to a lower rate, but it can't be done because the holder of the 2nd mortgage won't play ball. If you want to put yourself into a financial straight-jacket, then get a 2nd mortgage (home equity loan.) I'm also having trouble following your logic, so I've cut it down to what I understand: 1. " getting the home equity loan and using it to pay off the other debt that I currently have?" 2. "once the house sells, both the house and the equity loan will be paid off" 3. "then used the profit to pay off my bills?" If you are going to use the equity loan to pay of your debt (bills) what bills are you going to pay off with the profit? I know your dream is a smaller home on more land, but I think your first dream should be to get out of debt (not into more debt.) Take it in phases. Pay off your debt. Sell you house (which will take a while unless you want to give it away.) Get your smaller house.

Number 3 of you choices here is not valid as the bills will have already been paid off. The portion of my post that stated the profit would pay the bills off will be what happens if I just wait until the house sells and will not include the loan. Original loan holder will not refinance down because my rate is already so low...not to mention the closing costs to refinance. I know what you are saying though

[Surefire]

I agree with that but on the other hand I have to advertise the house at the smaller square footage, bedrooms, etc....because it has to be heater square feet to be advertised. This in turn makes it look as though my price is comparably too high and that the house is much smaller than it actually is. This affects the amount of people that call about the house and actually feel interested in the house.

Can you not just advertise as currently x, but with potential to be y.

Also can you mention that either you will do this before completion, or it will be something they can do, or give the option?

[GDWindowpane]

If you have high interest debt then getting the equity loan to pay off the debt makes sense as long as the interest rate on the loan is lower which most times it is. As mentioned earlier the danger lies in people that get the equity loan, pay off the high interest debt but don't stop spending therefore accumulating more high interest debt. Can become a vicious cycle.