Payoff Mortgage? Invest for remodel?

20 years ago

We bought a new home (value 190k) in February and currently owe $144000 on a 30yr 6.625% interest. We have sold the home we are living in now and will net around $135000. (closing is June 15th) Do I pay off this new mortage with the money from this sale and save all of the interest money or do I invest it?

We will be adding on to our new home and renovating a kitchen. My wife doesn't want to start it untill this fall. Do I keep the money handy until the renovation or should I just use an equiline of credit at 1% over prime? We can adjust the current mortage one time to shorten the years or adjust the payment. (at no charge)

What would you do?

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Comments (10)

jasper_60103
20 years ago
You didn't mention how much you're budgeting for the remodel?
Maybe pay down current mortgage with the difference.
Keep the rest handy for your remodel in the fall. Its just a few months away from June 15th.

Re: equity line. Why pay interest (and closing fees) to borrow your own money?
steve_o
20 years ago
The key to investing the money is whether you can do better than 6.625% after investment fees and charges and any income taxes are subtracted. There also is the possible issue of capital-gains taxation (you should consult a tax-type person about this). There also is the issue of what the tax deduction may be worth to you. It might be worth investing the money right now, getting the mortgage deduction (if you can) for a couple of years while it's high, and then paying off the mortgage (though I'll admit to not having run the numbers on this myself).

The prime rate right now is around 7.75%. A point over prime puts you at about 2% more than your current mortgage rate. Does it make sense to pay off a debt at 6.625% and then borrow money at 8.75%? Especially when the 6.625% is deductible now and you'll likely have to pay closing costs or other fees for the 8.75%?

In my situation, I'd hold on to the money, pay for the improvements, and then apply the rest to the mortgage. But that's me and my outlook. Again, you really should consult a tax-type person about this.
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I've been following this thread with interest & amusement. Some pretty hard line stances here. For the record, I consider my primary residence an "asset". It shows on my Balance Sheet as such and since we still have 8 years left on our mortgage there's a corresponding "liability" against that asset. However, when I calculate our "Retirement Savings" that asset is not included. We max out my husband's 401(k) & my IRA before we calculate what we can afford for housing costs. Houses go up & they go down. Neighborhoods have a life-cycle. If the location, etc. is good, they appreciate over a 2-3 decade period. Over this time frame, there will be periods of higher than normal appreciation & there will be periods of recessionary elements pushing back at the appreciation. Overall, during this time in a home's life cycle the overall average momentum will be up. Then, as they start showing their age...value begins to drop & often these neighborhoods become low income. After that phase, a lone wolf appears & purchases a piece of property...puts hard money into the place & renovates. Then another sees that there's potential in these old, run down places & buys into the lone wolf's dream. Soon, the old neighborhood is considered an "up & coming" place to be. And, the cycle begins anew. I don't know how long I'm going to own this home I'm living in now. I don't know where it will be in its life cycle when I decide it's time to sell. I may live here 30 years. Or, I may move next month. Due to the uncertainty of both when I will sell & the life cycle of real estate, I do not consider my home as a source of retirement income. I choose to raise my family in a stable environment. Therefore, I do not bounce them around from one house to another every 3-5 years treating my family home as an "investment" that requires portfolio management. Of course I'm pleased if the property appreciates. But, you won't see that appreciation on our "Return on Investment" calculations. It shows on the Balance Sheet only. Personally, I couldn't sleep at night if I was making a mortgage payment so high that I couldn't max out my 401(k) & IRA's every year. I'm old enough to have lived through several "boom & bust" real estate cycles. The appreciation of the last 4-5 years couldn't & won't last indefinitely. Prices will fall back & then slowly climb again. Remember back in the heady Nasdaq days? People were saying such ridiculous things as, "Oh, you're being a fool. It's a NEW economy now." Oh, phooey...there's nothing new under the sun. A company has to eventually make a profit or it will collapse. P/E ratios have to have some sanity behind them. Real estate is no different. It also must find a balanced equilibrium and it will. For some, the pendulum swings are painfull. Because of its inherent "cycles", I don't consider my primary residence either a "cash cow" or a retirement investment. So, there's another opinion. And, it's just that. My opinion. It works for us. The mortgage lenders say we can afford 5 times as much house as we have. We say that we can't afford that much house. We have to save for retirement first before we start spending. Our parents tought us to always save first. Tricia
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housenewbie
20 years ago
Also consider whether you have several months' worth of living expenses in a savings account, just in case. If not, don't use all that money to pay off the mortgage.

I usually wind up splitting the difference when it comes to these decisions--some goes to mortgage, some goes to savings, and maybe I buy myself a present so it's not all 'business'.
skeeterbug
Original Author
20 years ago
The equiline is available at all times. There were no closing costs or appraisal fees. They (the bank) gave me $100 from a lumber store to open this account at the dollar amount I wanted. The equiline is for 80% of the equity in my home which then was only 70,000. I write a check to pay for whatever and then a payment plus interest is withdrawn from a money market account. I got this equiline then never used the money. However it is always available. I can also deduct the interest from this type of loan.
I do not know what the addition will cost just so it is below what I will net from the sale of our home.
I think I am covered as far as living expenses for three months.
I thought if I paid off the mortage I would not spend as much on the addition. The tax deduction for interest is not a good selling point for me because What I save in interest over the life of the loan is a lot.
I just wondered if anyone had some good advice.
ian_bc_north
20 years ago
Hello Skeeterbug,
I sounds to me as if you have reached that point in your life when you should consider talking to an investment counselor.
If, as Steve O pointed out, you can borrow money at 6.6% and it is possible to clear better than that after taxes, then it is worthwhile to invest that money.
A full service investment broker should be able to go over your whole picture and point you in the right direction.
If I were in your shoes I would be asking acquaintances for references to a broker one can be comfortable with.
Even if you reject the brokerÂs advice you should have a clearer view of your options.

I was reluctant to jump in, as this would seem to start to fall outside the realm of household finance and into the realm of investing.
I also live in another country in which the rules are different.
Here having an interview with an investment broker costs nothing. There are only charges if he sells you something.
Ian
skeeterbug
Original Author
20 years ago
I tried to find a financial consultant that would work with me on all aspects of finance. However when I told them I didn't want to buy anything but would gladly pay them for their advice they lost interest. After a while I decided to pay off my mortage and invest the interest that I would have saved. I raised up my contribution in my 401k and continue to save in a 529 account for my children 4 college.
I wanted someone to plan my finances not to sell them to me. I tried to look through the trees and constantly look at what it cost me in the end.
That is why we bought this other home, to invest.
steve_o
20 years ago
skeeterbug, it's hard to give what you would consider "good advice" when the details come out in dribs and drabs. You've gotten some sound advice here (and not just from me).

You really should sit down with a financial advisor familiar with your situation (tell him/her all of it) and the laws in your area. You can find a good financial advisor through the recommendations of friends or you can contact a credit union or your (or your spouse's) company's benefits folks or even search on the Web for the terms independent financial advisor and the name of your state. The key is that you will have to pay them as they are not paid by commission from the investments they're pushing. If a professional is offering financial advice for free, they're being paid somehow. Avoid them.

I also think you need to clarify (or at least think through) a couple of things. First, the equiline LOC sounds like it was based on your old house -- the one you just sold. You don't have $70,000 in equity in your new house yet if you bought it for 190K and owe 144K. Do you still have access to that LOC?

Also, why is it good that the LOC interest is deductible when the "tax deduction for interest is not a good selling point for me because What I save in interest over the life of the loan is a lot."? This doesn't make sense to me. You care about the lifetime cost of the mortgage but don't care that it's deductible; yet you don't seem to care about the lifetime cost of the equiline and do care that it's deductible? Unless your loan agreement is written differently, there is nothing chiseled in stone that says you have to pay off your mortgage over 15 or 30 years or a LOC in 2 years or 10. Pay it off quicker and pay less interest, whether it's the mortgage or the LOC.

Finally, there are many out there who say that a home should not be considered an "investment" -- that between the purchase price and what you spend on upkeep versus what you net in the end, it really does not offer a better rate of return than many other instruments. It does offer diversification, though, which may be the primary financial benefit to home ownership. In your case, at 190K for the house and, let's say, 75K for the addition, you've put $265K into your house before maintenance and other "improvements." You'll have to get much more out of it when you sell to make this "investment" worthwhile. Not saying you won't, but people tend to underestimate what it costs to keep a home.
skeeterbug
Original Author
20 years ago
steve O
Thanks! Sorry for the dribbing and drabbing, I eat slow too!
I was stating that the interest from the equiline was deductible only to make a point. You are correct in your assumption that once the old home is sold will I have to establish another equiline on the new home. I would think that I would have to because how could you borrow money against a home you don't own.
You have given good advice and I appreciate it very much. Even though I feel like a dribber now.
I agreed with your first post " In my situation, I'd hold on to the money, pay for the improvements, and then apply the rest to the mortgage. But that's me and my outlook. Again, you really should consult a tax-type person about this."
I liked it because it was along my same line of thinking, I just wanted to hear it from someone smarter than me.
I have gotten to a point in my life that I would rather put money into a home than into an IRA.
A home as an investment? I agree with you, but like you said "it's diversification" so it still is an investment.
Thanks!
steve_o
20 years ago
I don't know as I'm smarter than anyone else when it comes to financial matters, but I like to think that I'm good at listening to many different viewpoints, asking analytical questions, and distilling it into what seems to be the truth for me. Sounds like you and I are on the same page.

It also occurs to me that, if you keep the proceeds from the house, when it comes time to pay for the remodeling, you'll have cash on hand. Nothing like having the money "in your pocket" when you negotiate with someone selling you something....
liz_h
20 years ago
skeeterbug, there are lots of fee only financial planners out there. If you google the term, you should be able to find referrals to some in your area.

Payoff Mortgage? Invest for remodel?

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