Newbee Question Re: Home Improvement Loan

I would only finance with the home the home improvements. If you are not going to be in the house for 30 years, don't finance it that long.

For an auto, look at the 0 percentage deals.

For furniture, if you are going to move to a mobile home, will it make sense?

roughly the montly

a good idea to

Sounds like a plan.................. Cal

if you would live in the house for 5 years, only finance things which will be in good shape 5 years from now.

Carpet may wear and tear in the next 5 years- don't finance it, pay cash Counter tops would be in good shape after 5 years, OK to finance, but

30 years? did you calculate total interest paid relative to costs of counter tops? paint will need to be redone in 5 years- do not finance new floors should last 5+ years, OK to finance, but again 30 years appears steep.

I wouldn't get a home equity loan. They normally have a variable rate, and rates are going up fast. You might end up with a payment far larger than you figured.

What you really want is a new 1st mortgage at a fixed rate. What you can do is apply for a new mortgage, and use some of the funds to pay off your existing 1st mortgage in order to let the new loan be in 1st position. That will get you the best rates.

Also, you want to keep the term short. It makes no sense to finance a car, an item that falls apart after just a few years, with a 30 year loan. Take a 10 year loan at the max. If the payments are too high, that is your clue to spend less. And think about getting some good used cars...why not let someone else take the beating on depreciation?

-john-

In my professional opinion being in the mortgage business I feel paying off any home is the worst thing any person can do. The reason for this is because equity in a house gives you no type of return....it just sits there. If you were take your equity and use part of it to fix up your house and use the other part to invest, over time your investments will pay for improvements. If you wanted to take the investment path one step further you can restructure you current mortgage after taking out some equity and obtain a Retirement Loan. A Retirement Loan will allow you to lower your payment or keep it close to what you currently pay (even after you cash out), and give you an opportunity to reallocate some of your mortgage payment towards an investment account.

Uh....however......

Paying off your home is the same as investing money in a fixed income instrument. Fixed income assets with minimal risk pay in the 3-4% range nowadays, and they're taxable.

Paying down your home is the same as investing in a fixed income instrument, and getting the mortgage instrest rate. So, if I'm mortgaged at 5.75%, I'm investing at 5.75%, ***tax free***. That can up your effective ROR to 7% in some cases. That's pretty damn good.

Of course, if you're getting a bennie from your mortgage insurance because it kicks you over the standard deduction, that has to be deducted from the effective intrest rate you're getting from the payoff.

Hm. Investing with borrowed money.......

Mike

Really? Say your mortgage payment had been $1000 per month and now you don't have a mortgage payment. In terms of disposable income, that's an extra $1000 per month. Didn't your house give you that $1000?

Elizabeth Richardson who doesn't have a mortgage (Yea!!!)

improvement

How old are you, how much have you saved for retirement, how much will you need in retirement, and how much do you need to save each year to meet your retirement savings goals? Do you have any kids who will be going to college? What is the plan for paying for that?

My point is that no one can advise you on whether or not to take out a huge home improvement loan until they know what your overall financial situation is. If your retirement savings and college savings are on track, and will continue to be on track if you take out this home improvement loan, then knock yourself out and have fun. If taking out this huge loan will mean spending your retirement in a junky trailer court living in a trailer built in 1953 (don't laugh; there are plenty of these here in Arizona), then I personally wouldn't do it.

Andy

Its silly to assert that equity in a house gives you no type of return. At the very least, a mortgage-free house gives you the equivalent of whatever fair market rent is for a similar house in your area. Another way to look at it is that a paid-off house gives you a return equal to the interest you would be paying on a mortgage.

Before my wife and I paid off our house we were spending thousands on mortgage interest every year. We now invest those same thousands instead of paying them to a bank.

Andy

I don't exactly agree with you, but I do question doing this "pay down the house and treat it as a fixed return" idea. Of course, it depends on the specific situation at hand, but suppose (1) you're saving enough for retirement and have enough insurance/whatever for unexpected situations; (2) you have enough disposable income to lead a comfortable life; (3) you have additional income to make loan payments but can't afford to obtain whatever it is you want outright; and (4) your situation is quite secure (in terms of income, property appreciation, etc.). Why not use the extra money to live it up? You could die tomorrow.

The reason I don't entirely agree is that I'm really against the concept of debt (even secured debt). I'm more comfortable thinking paying cash down is the way to go for everything, even buying a house (i.e., don't buy a house if you can't pay for it entirely--not that this is a logical argument; it's a psychological feeling that I have). I'm also not happy with materialism in general but that's another issue. But I'm quite convinced that that's not the best advice to give or follow.

The issue is particularly relevant when you're younger. I believe saving to death is not a good philosophy either; it seems the motivation of why we're here gets lost (both ways).

I struggle with this quite a bit philosophically (my wife makes the real decisions :). So my general rule of thumb is that you should use equity to take on debt in a manner that your net worth generally rises. Even if it's slow, it's okay--at the end of the thirty years, you'll have paid it off.

Besides, interest rates are so slow that it seems locking in a long term rate now seems like a good idea: I don't expect rates to be low like this again for a very very long time. Just my gamble.

--Ram

There is no greater rate of return than the peace of mind that you have living in a paid for house and knowing that no matter what happens, no one can take it away from you.

I am also amused at how all of your solutions involved paying huge fees and outrageous amounts of interest to people in the mortgage business. That is like listening to a used car dealer tell you that a car is in real cream puff condition. You know by default that you cannot trust the information.

-john-

So now you are telling me that if two different families both had $400,000 to buy a house. One family put down $400,000 to purchase a home out right, so that they could invest $2400 monthly (a typical payment if you were to finance)and the other family financed the home with a retirement loan which takes 20% down ($80,000). Now their payment is $1200 month so they invested $320,000 and will plan to invest $1000 month because they were able to free up this amount using this special loan program (which is available). Which family would have the higher assets and be the most liquidable? Family #2 by a very huge margin!

My thanks to all you guys who responded to my positing about a Home Improvement Load, etc...

Great advice and some food for thought. I'm thinking now that if I proceed with the loan, it would be for just the home improvements and not the other items which depreciate fast - like cars, furniture, etc. Or I may just get a short term loan for those items alone.

To answer the questions from Andy, I am 59 years old. I don't have really anything actually saved for retirement, except I will have a retirement from the State of California which will be about 1500+ a month depending on how much longer I continue to work, and then Social Security which will (hopefully) also kick in in about 7-8 years. Plus my wife will have same-ish. So together, we'll be all right. But neither of us want to keep our home when we actually do retire, as it is a lot of work and upkeep, and we can do better with something smaller. Yes, we will have kids college age soon. I have no plans for that. We will help them all we can. They'll have to put themselves through school, which is what I did, over a period of time.

Anyway, the way I look at it is, if I were to refinance our home and add enough to fix it up, and make it a 30 year loan, I have no intention of actually staying in the home for 30 years to pay it off. It is our plan to sell it within 10 years. Our financial situation would be no different if we were to sell the house now and then buy another house of equal size and in good condition with no fix up needed. In today's market that would be about 450,000 to 500,000, and we'd be financing about half of that for 30 years and we'd be in same boat, more or less, if we just got the home improvement loan for our current house and fixed it up.

And so on.....

Again, thanks for all the responses!!

Richard Wakeman