[kuhwks]

I'm new here, and my search for independent third party advice brought me here.

Last week I had an opportunity to purchase a much larger home that had been foreclosed on come to me, and I am deciding on whether to make an offer or not. So, let me know your thoughts based on the following.

We currently own a home with a value of $131K. We currently owe $103.5K at 3.75% on it (21% equity). We have 2 credit cards that have a $4-4.5K balance each ($8-9K total). Other than that, we only have our car loan for our two cars. We owe $20K on that at 4.25% for 3 more years.

The new home would have a specific space for my wife's in-home daycare. This would allow for an added child or two to be added to the daycare and allow for our personal living area to be seperate from the daycare which is a GIANT point of contention between myself and my wife (YEAH! No more disaster area for a home.).

To top it off, the new home is 3400sqft vs. the 1980sqft we currently have. Appraised value of the new home is $280K, but the asking price was just dropped to $185K (potentially 34% equity)and it would require appox. $3K in repair work for the daycare to be certified. Oh, and the new house would be 10 years younger.

My thought is to buy the new house and borrow enough in the mortgage to wipe out the credit card debt which is at 14-28% interest (3.75% is a heck of a lot cheaper). We would then have no unsecured debt, double our current Net Worth, over 40% equity in our house and cars, and free up the CC payment money to build up the emergency fund and drop what is left on the auto loan until gone approx. 18 months from now. After that, excess cash would go to the principal on the house, and we could be completely debt free about 15 years from now. With the extra daycare children and upgraded pay for myself, it could be before our two children go to college.

Thoughts?

 

[laura-n-sasha]

We currently own a home with a value of $131K. We currently owe $103.5K at 3.75% on it (21% equity). We have 2 credit cards that have a $4-4.5K balance each ($8-9K total). Other than that, we only have our car loan for our two cars. We owe $20K on that at 4.25% for 3 more years.

Would you be able to sell your home for $131K? Check out Zillow.com to see the price range.

You also need to think about other things that you might not have considered:

Moving into a bigger home means more heating, cooling, maintenance, lawn mowing, snow shoveling, more water, gas, electricity, window treatments, carpet cleaning, wood floor polishing, etc.

You will be spending more time on the cleaning and maintaining of your home. You need to factor in what your time is worth.

You will probably have to consider, especially if you are having a day care center in the house: lawyer fees, permits, considerations with the new neighbors (or HOA laws), plus the house would probably need to be warmer than normal and cooler than normal. You will also have to make sure about liability issues with the day care - parking, more traffic therefore making sure the sidewalks are cleared, no slippery surfaces, etc.

Your interest rate is pretty good at 3.75%, you will probably not get such a good one now, the interest rates are going up. Expect ~ 5%.

Also, you need to figure out how your house would sell, and that you may lose 3% just in a buyer's agent, plus another 3% for your agent. Plus, depending on where you live: you will have to pay for title insurance, lawyer's fees, settlement costs, financing costs, mortgage people, usually no matter how expensive or inexpensive a home is, around 2-3K in closing costs (at least!)

How are you going to get people to know about your day care. Most neighbors do not want it "in their backyard". How long would it take to recoup the 3K to get the house up to standards?

Why can't you do a daycare in the house you have now?

 

[stinkbug]

Wrapping consumer debt into a mortgage....very, very, very bad idea.

 

[MomToTwoBoys]

We recently sold our first home in the last couple of months and purchased a new one of our own. We listed for $235k but sold for $200k, plus made $2500 off of the commission because the realtor helped us sell our old home and purchase the new one.

After we had paid off the mortgage, we paid the realtor fee + lawyer fee and after that, we had $88k left. We paid off credit cards and what the inlaws helped with home renovation costs, plus put $2200 back into a savings account. After the purchase of the new home, we don't have any credit card debt and were able to secure a home for $265,950. We paid $65k in cash onto it, so our mortgage is just over $200k.

The older home was 1186 sq ft with a partially unfinished basement. The home we're in now is 936 sq ft but it's 95% finished, so we technically have 1850 sq ft.

A lot of what you're talking about sounds like what we did. It was actually suggested for a couple on Till Debt Do Us Part for them to tack on extra to the mortgage to wipe out their credit card debt and it only added a couple of hundred onto their mortgage (they were paying 10 times that per month in interest and monthly payments).

I think your logic is fine as long as you're doing both things: paying less in interest and consolidating your debt. The downside is that you're purchasing a foreclosure, which could mean way more in repairs than you're expecting. Have you had a home inspector go through the house to make sure there isn't anything hiding that you aren't taking into account for?

 

[kuhwks]

Why can't you do a daycare in the house you have now?

Already have a daycare in the current home for the past 5 years. Already have liability insurance and the cost would not change in the new house. There is no HOA in the new neighborhood, but the new house is only 6 blocks or so from the old house.

The interest rate we currently have would be the same rate on the new house. We just refinanced the old back in October '10 when the rates bottomed out, and the bank is pretty easy to work with since my mother-in-law works there.

As for the consumer debt rolled in, I wouldn't even consider that without having the large equity available in the new home. Of course, we have already looked into what our current home would sell for, and we likely will use the proceeds from the sale of the old to pay the CC debt off and do the upgrades to the new home for the daycare in the basement.

Yes, we will be having an inspection of the whole house and a couple of specific ones for termites and roof, which are standard and required in KS. Anything we find can nix the deal if we'd like.

 

[Greebo]

My thought is to buy the new house and borrow enough in the mortgage to wipe out the credit card debt which is at 14-28% interest (3.75% is a heck of a lot cheaper)

False - you would be moving it not wiping it out.

You want to move 9k of CC debt at ... lets average it to 21% and put it on a 15 yr mortgage at 3.75%. Your min payment is... what, about $300 combined? If you maintained that payment (not chasing the minimum) and stopped using the cards you'ld have the cc debt gone in 43 months paying $3873.40 in interest total. That same 9k at 3.75% for 15 years is $5062 in interest.

You'll pay $1200 less if you just pay the current minimum payment and never pay less. You'll pay even less if you pay more than the minimums.

Secondly - ROLLING NON SECURED DEBT INTO SECURED DEBT HELPED CAUSE THE CURRENT MELTDOWN. STOP DOING IT!

Finally - I've also never heard of a "cash out purchase mortgage" - only cash out refi's. Not even sure your plan is viable. Maybe though - plenty of brokers out there willing to draft up dodgy paperwork I'm sure.

 

[mndtrp]

It's good to have Greebo around, because he'll put things into simple numbers for you. I would have said that you needed to check how much interest you would be paying over the life of the loan, as opposed to simply paying off the cards as is. I wouldn't have done the math, but as Greebo pointed out, a smaller interest rate doesn't necessarily mean less interest paid.

Other than that, one thing that I would try to look into when doing the day care remodeling, is whether or not you can isolate that part of the house when it's not in use. If you aren't using it at night, there isn't any reason to heat or cool it.

 

[cottageliving]

I would be very careful before making such a move unless you have at least 6-9 months living expenses set aside as a cushion. The other posters have brought up very important issues to be considered.

In addition to the extra maintenance and utility costs associated with the larger house, the RE TAXES will be calculated on the higher value, not the distressed price you may pay for the house. And with all the states' budgets in trouble you can count on taxes going up from where they are today.

And think carefully about the interest dollars you are actually paying by wrapping your unsecured short term consumer debt into your long term mortgage loan - just as Greebo pointed out, it will not only cost you more in the long run, but you will be tempted to spend on credit again to fix up the big house. The reality is that most likely you will have the old debt in the house payment PLUS some more new shorter term higher rate debt to repay.

All the best to you in whichever way you decide to go.

 

[luminajd]

Can you afford to carry 2 mortgages? What happens if you buy this home, close on it, move, and the other wont sell?
I wouldnt keep emphasizing all the equity you would have in the new home. It's value can drop in a heartbeat, just like much of the rest of the country.
I will ditto many others than rolling consumer debt into a mortgage is a terrible idea. Many people who do this then have credit cards with zero balances. Then the new house needs a water heater, put it on the card. Need something for the daycare, put it on the card. And you are right back to where you started, only with MORE debt.
How much of an emergency fund do you have?
If this move is truly better for your family, I would look into selling your home, THEN purchasing the new one. For purchase price, not rolling your credit cards into the loan.
And I cant imagine only one or two extra children in a daycare could possible bring in THAT much of a boost in the income to take the many chances you are suggesting.

 

[frugalcdngal]

Have you taken into consideration that utilities will be higher for a larger home. Also property taxes will likely be more as will home insurance. Unless you get rid of the credit cards and never ever use them again DO NOT add them to the mortgage. If you think you can keep them just for "emergencies" you will regret it, and end up deeper in debt.

Bigger houses just cost more money...plain and simple. If your happy in your home, stay and accumulate more equity. The equity you have right now is only really enough for legal costs and moving. I would wait a few more years until you have more equity.

 

[frugalcdngal]

Wrapping consumer debt into a mortgage....very, very, very bad idea.[/QUOTE

I think it is okay if.....BIG IF....one gets rid of the credit cards and does not extend the amortization period of the mortgage. Being realistic though, most people say they will not use the cards again and then an emergency happens or life happens and they end up deeper in debt.

 

[Greebo]

Wrapping consumer debt into a mortgage....very, very, very bad idea.[/QUOTE

I think it is okay if.....BIG IF....one gets rid of the credit cards and does not extend the amortization period of the mortgage. Being realistic though, most people say they will not use the cards again and then an emergency happens or life happens and they end up deeper in debt.

Can you give me an example of what you mean?

 

[frugalcdngal]

Can you give me an example of what you mean?

Sure. I know of people who refinanced their mortgage to add consumer debt with a slightly lower interest rate, but then added to the length of time they would be paying. So they had 20 years to go on their mortgage, but decided to make it a 25 year mortgage instead to "lower" their monthly payment. If you have 15 years left and add $10k to your mortgage......that is one way to go.....if you add $10k to your mortgage....and change your amortization period to 20 years well....you are not really saving money. When I say amortization, I mean the entire term of the mortgage, not the term of the interest rate. I am in Canada. I have 15 years left on my mortgage...however my fixed 5 year interest rate is up for renewal next year. Maybe things are different in the U.S though.

 

[scottp999]

At a macro level keep in mind that houses are now devaluing property for the foreseeable future. More reforms to available credit that are being discussed in the reorganization or wind down of fannie mae and freddie mac may additionally change the supply of money that props up housing prices. Not even mentioning the unsold inventory on banks balance sheets that they are trying to strategically put on the market at the right time to minimize hits to their balance sheets.

You didn't post the full terms of your mortgage, is it a fixed 15 yr or an adjustable arm?

With 100k left on your only secured debt, depending on the full terms of your mortgage, you could probably be mortgage free in about 6.5 years by sending in a principal payment of about 1k per month.

Someone else mentioned the transaction costs. Only you know what you want to do, just hope some of these posts get you thinking about all the unforeseen possible consequences. Good luck. I personally believe housing could have another 30% drop in store. My small home went from 320K in 2006 and is now valued at 180k. The price in 1998 was 115k, and I could see it continuing down to about 125k. Real estate is local, but I'm in a pretty good area. I was lucky to buy at the 115k level, but many of my neighbors bought at 290-320k with large mortgages. They are now cornered with no way out and a job loss would surely have them quickly burn through their savings and/or walk away from the house.