Another cash-out refinance question

spacificAugust 24, 2009

We have been planning on building a garage with apartment above on our lot. It's zoned to allow 2 units. Back in the day, we had a HELOC with plenty available on the line of credit to pay for the construction (approx. $100k). That was pulled last year. With a current appraisal of approx. $700k, and current 1st and 2nd loans of $510k, if we add the $100k in loans, we're above 80% ltv. After we build the 2nd unit, the property should appraise for over $800k. Credit scores border good-excellent. What are our options for refinancing... any?

This apartment would generate more than $1,000/month gross income in rent.

Does anyone here have experience with the FHA cash-out refi program? On an online search, it seems it's at 85% ltv but was at 95% ltv up until last spring. Is that still the case?

I appreciate any/all advice or ideas. Please ask if you need more information to answer the question.


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Dave, I read all your comments and the article about refinancing. Thank you.

We plan on keeping this property as our primary residence and renting out the back unit, but our debt ratio is fine with the additional loan if we don't rent it out. (only debt is mortgage, 1 car payment and one cc that will be paid off before doing a refi.)

Our plan is to keep this property as our primary residence for at least 8-10 years, most likely more.

    Bookmark   August 24, 2009 at 9:37PM
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I guess some people never learn. This is exactly the way so many people got in trouble in the first place. You already have 2 mortgages on your home and credit card debt.

Before you think about expanding a home, get rid of your other debt, including the car loan, and start saving up for the project. If you think your house is worth $700k right now (it probably isn't, but just for arguments sake) and you put in $100k in improvements, it is most likely NOT going to be worth $800k afterward. You MIGHT get a 70% return on investment, and that would be a stretch for most construction projects. Additionally, the market is still going DOWN in most places. You could easily spend $100k now and then the house value could stagnate for a year or more even with the improvements.

I know you plan on staying in the home for 8-10 years, but plans change. What if you get laid off, or hurt, or a family member gets sick? Do yourself a favor and keep your financial stability intact until things turn around. Use the extra money you would be spending on mortgage payment to get rid of your other debts and start saving for this project, so you aren't out on a limb with 100% financing.

    Bookmark   August 25, 2009 at 8:59AM
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Billl, yes you ask some good questions about plans changing. That's always something to consider, in any endeavor one embarks upon. The credit card, by the way, I already mentioned would be paid off before doing a refi.

As for 70% ROI, actually, a number of the trades will be done by us (sweat equity). If we were completely contracting the build out, it would be closer to $140, so I actually considered the 70% ROI when estimating the after-build value. Additionally, though you didn't ask about our particular market, the property is just a couple of blocks from the ocean. The main house has a very nice view, and thus enjoys a preimium in value (and even in this down market, I get unsolicited offers to sell). And the new apartment would have a 270-degree, unobstructable view, again adding a premium that I'm not counting on, but know it's there.

If house values continue to stagnate, which is a very real possibility, we can choose to rebuild equity by taking the rental income and using it for accelerated mortgage payments.

Your first comment, "I guess some people never learn..." Well, I'll take that with a grain of salt. I too am frustrated by the economic mess. But I also know that to get out of the mess, those that can move forward with building projects, business expansions, and other entrepreneurila activities will be those that are part of turning things around.

On this project alone, I would be putting two laid off friends to work (both skilled building tradesmen) for about 4 months. That in turn keeps them able to pay their mortgages. And when neighbors stop by to see the construction project, maybe they'll think of projects at their homes that need doing (especially when they see the quality work these 2 guys do)! And then maybe these guys have enough work so they're making a living again and their homes are not in jeopardy. So maybe they'll buy some new tools to expand their business capabilities, and it continues to spiral upward from there. Just think if people started thinking that way for a change instead of waiting for everyone to wait for someone else to fix the economy?

    Bookmark   August 25, 2009 at 10:00AM
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I meant "entrepreneurial" not "entrepreneurila"... typing to fast with no spell check!

    Bookmark   August 25, 2009 at 10:06AM
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Best of luck if you want to go through with this, but I think a lot of your assumptions are highly speculative. It is nice to want to help put friends back to work, but you are doing it on borrowed money. The little signs of life I can see in the housing industry are mainly in low end homes. The government is propping those up with tax credits. Everything above a purely entry level home is still sinking. I would expect that higher end property (like places on the ocean) will be one of the slowest areas to recover.

Also, as a country we are WAY overbuilt right now. We have ton of vacant homes AND low rental occupancy rates. It is going to take a bit of time to burn off that excess capacity in both single family homes and rental units. How does the rental business look in your area? What is the vacancy rate? Do you have a plan for what happens when you can't rent the place or you get a deadbeat tenant?

    Bookmark   August 25, 2009 at 10:56AM
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