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Home improvement loan- Any insight

Old 01-25-2011, 07:16 PM
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Default Home improvement loan- Any insight

Hello

I want any and all input.

Long story short- We bought a home last year. We love the home and want to expand it. We would like to add two bedroom, two bathrooms. We have 75% of the cost in cash in hand but dont want to exhaust our funds. We would like instead to take a loan for half the cost and pay half the cost out of pocket. We want to do this so we dont exhaust our savings just in case.

Here is the problem, since we bought the house so soon, we have little equity so we cant get a home equity loan (so we think). How do you get a loan without added security but once the home addition is complete it will be worth much more.

Any experience with a 203k loan? Should be borrow from our 401k? Any lenders have a specific loan for this? I could not find any.

I am just getting some outside the box ideas in case I am missing something. There are some real bright people on this site.

Thank you in advance.
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Old 01-26-2011, 03:05 AM
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Cheapest way to borrow money is off your own CD's. Home EQ loans are not that high but something you mentioned is not always true.
Adding to your home making it worth a lot more. This all depends on the where everything is at what time.
According to our so called experts my home value lost 150,000 when housing market went down so don't expect the extra work your doing to up the value all that much. It will depend on the times and with prices climbing ever day and our housing market just about back to 2007 standards what you put into it you more than likely won't get back out of it. Its more a cost for your own enjoyment than a investment. Lots of factors in there to, where you live, job market around your home. ect. ect. Always about Location, location, location..
You can price yourself out the market around you if your not careful and if gas hits 4 dollars again you'll be headed down before you finish building. Just fuel for thought.

Borrow money off your own CD's is the cheapest........... Usually under 3%
Home EQ loan. (you can take this off your taxes) .......... Around 5 to 6 %
Bank loan........... 5 to 7%
Borrow it from the inlaws and outlaws... ...........N/A (pressure on paying it back with lots of phone calls. )
You said options............

Last edited by liveaboard74; 01-26-2011 at 03:42 AM.
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Old 01-26-2011, 05:59 AM
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Originally Posted by captbone View Post
Hello

I want any and all input.

Long story short- We bought a home last year. We love the home and want to expand it. We would like to add two bedroom, two bathrooms. We have 75% of the cost in cash in hand but dont want to exhaust our funds. We would like instead to take a loan for half the cost and pay half the cost out of pocket. We want to do this so we dont exhaust our savings just in case.

Here is the problem, since we bought the house so soon, we have little equity so we cant get a home equity loan (so we think). How do you get a loan without added security but once the home addition is complete it will be worth much more.

Any experience with a 203k loan? Should be borrow from our 401k? Any lenders have a specific loan for this? I could not find any.

I am just getting some outside the box ideas in case I am missing something. There are some real bright people on this site.

Thank you in advance.
I have a couple ideas for you, and some addional thoughts you may not have considered. Your geographical profile is only "United States", so please take in mind that my views are based on me being based in the Northeast.

If you have a relationship with a local bank (I am ssuming you do as you just got a recent mortgage), they will loan on a new estimated Loan To Value (LTV) taking into account the homes value after the reno's.

There is a catch here though. Do not assume that two addional beds and two additional baths will give you a huge equity boost. You need to assess your home's style and value vis-a-vis the rest of the neighborhood. If the entire neighborhood is 3 bed 2.5 bath capes and colonials (3/2.5), and now you come along and have a 5/4.5 set up, you may have just hurt yourself. An appraiser may not be able comp your home and there may not be added equity as your home, although the biggest and maybe the best, has become the neighborhood outcast.

Can your septic handle two addional beds (assuming you are not on sewer)? What about your mechanicals? Furnace sizing? Hot Water? Electrical panel sizing?

What will the layout and function be like? Sure anyone can throw on two additional beds and baths, but what will it do to layout and flow? Will your layout now become one of those mazes we did as a kid where you start at one end and try to get out the other? Also, depending on your municipality, and how much you change % wise of the original home, you may find yourself in a situation in which you now must bring the whole home up to code compliance. What year was your home built? Lead issues?

Picture your house with the addition you want, and now picture that house in your neighborhood and see if it sticks out or not.

Anyway, back to your original question

GE Finance and HSBC both offer options for what you are looking to do. Be warned, they can both be difficult to work with at times

Remodeling contractors in your area may offer financing. However, please see my previous point, they most likely will go through GE or HSBC

Contractors in your area will have relationships with local bankers and get get you in touch.

Call your existing note holder and explain to them what you want to do, and see if they will wrap the existing loan into a refinance based on the new LTV (assuming your addition adds equity - dont be fooled by what you see on DIY and HGTV, not all remodeling adds equity). You need to threaten the refi card with your lender, basic finance math tells you that the note holder will lose money if you refi in less than a year, they will want tot work with you

Hope this helps.
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Old 01-26-2011, 06:26 AM
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Thanks for taking the time to respond guys. Great advice.

I am on Long Island. I ended up buying the smallest house on the block on the water in a good location. All of the other homes are 3-4 beds and we are 2 bedroom now. We bought close to the bottom. (so far)

I will look into HSBC. Thanks for the insight. I welcome all other thoughts.
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Old 01-26-2011, 06:34 AM
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Originally Posted by captbone View Post
Thanks for taking the time to respond guys. Great advice.

I am on Long Island. I ended up buying the smallest house on the block on the water in a good location. All of the other homes are 3-4 beds and we are 2 bedroom now. We bought close to the bottom. (so far)

I will look into HSBC. Thanks for the insight. I welcome all other thoughts.
That throws a curve ball in the works. Are you on sewer or septic? If septic, what is the sizing of your current system?

If LI is anything like RI, you will be looking at a minimum of 8-12 months for the permitting process alone.
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Old 01-26-2011, 07:04 AM
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We are sewer. You are absolutely right about permitting. We are meeting with contractors now to have the work start in 18 months.
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Old 01-26-2011, 04:09 PM
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We took a loan from my 401K to pay for our upstairs gut and remodel. We paid 1/2 from our savings and the other 1/2 in the 401K loan. You pay yourself the interest and we could determine any time length we wanted to repay it. No prepayment penalty either.

It worked out great for us.

Russ
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Old 01-26-2011, 09:30 PM
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It worked out great for us.

If you lose your job, the 401k loan is probably due in full immediately ...
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Old 01-27-2011, 07:11 AM
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How do you figure that? I took the 401K from MY money. How can someone demand I pay back myself? At worst case I would have to pay a 10% 401K withdrawl penalty and have to claim the loan on my taxes as income.
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Old 01-27-2011, 07:24 AM
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Originally Posted by RussH View Post
How do you figure that? I took the 401K from MY money. How can someone demand I pay back myself? At worst case I would have to pay a 10% 401K withdrawl penalty and have to claim the loan on my taxes as income.
It depends on how much you have in the account and the individual plan but if it is above a certain threshold they let you keep the account in your "ex-company's" plan. You just won't be able to add to it, but I would think that the loan could still be serviced.
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Old 01-27-2011, 07:27 AM
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I would agree with a 401k loan. The terms are decent and you are paying yourself back. I also agree that you need to feel comfortable with your place of employment for the extent of the loan at least. I just took one out last September it makes sense to lend yourself money and pay yourself back. Read the agreement because if you are terminated, quit and or no longer employed with your company the penalties are not so kind and you will end up losing more in the end vs just taking a loan from a bank. You can borrow up to 50% of what is already in your 401k and they will set up an auto payment out of every paycheck on top of what you are already paying into your 401k.
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Old 01-27-2011, 03:18 PM
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You guys better check with your tax people before doing a loan. Lots of strings attached to 401s ...
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Old 01-27-2011, 05:17 PM
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The loan I took against my 401K was for $20K to be paid back in 2 years. It is deducted from my monthly pay check including the 10% interest.

This is the 2nd time I have loaned money to myself and we have our taxes done by a professional accountant and they have never asked me anything about the 401K loan. I don't recall even seeing anything on my tax form where the 401K loan was even mentioned.

I think it's a great source of money and way better than an installment loan that you pay the interest to the bank. The only cost is the $50 loan generation fee that Vanguard charges.

Russ
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Old 01-27-2011, 08:42 PM
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The problem doesn't come from 'lending' yourself money, it comes if you lose, quit, or change jobs. Might want to ask you accountant what happens in that event. 10%, wow ...
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