Mortgage and Home Equity on New House

16 years ago

My husband and I are getting ready to buy a house. We have an amount for our mortgage that we don't want to go over but we are coming up short for the total down payment. This year we had to pay taxes and usually we get back about 10-12K each year. We were thinking about getting our mortgage and paying the total amount we what to pay but using our emergency savings. Then after we move in getting a home equity line of credit for the remainder that we took out of savings. I don't know if that makes sense but we want a mortgage around 150,000 but we are 30,000 short. We can take that money out of savings and replace it after we get the line of credit. We are normally good with money and save. We would take what ever extra money we had and whittle down the balance of the home equity. That way we would have that paid off at least within a couple years and have the mortgage payment we want. Or should we just get a higher mortgage and not touch our savings? Then we could pay down the mortgage with extra payments or refinance down the road. What would you do?

This is our third house we would be buying. We are putting down about 50% of the sale of the house and financing the rest. We would not have any PMI to worry with. I know the real estate market is a mess right now. I just don't want to tie our emergency savings into our first mortgage that's all. Just wondering what others have done in a temporary situation.

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Comments (3)

davidandkasie
16 years ago
i would not touch the savings. get a higher loan mount and still have not PMI to worry about.

why take something out of savings that is earning you money, and then turn around and borrow that amount to have to PAY interest on? you are earning at a lower percentage than the interest rate you would be paying. by keeping it all inthe 1st mortgage if possible, at least the interest rate onthe borrowed money would be lower. you could also pay a couple hundred extra per month towards principal and pay down the loan quicker.
feedingfrenzy
16 years ago
I would leave your savings where it is and get a bigger mortgage.

Borrowing an additional 30K on a 30 year mortgage will result in a monthly payment only about $200 higher. Contrast that with the amount you would need to come up with each month to pay off 30K on a HELOC in "at least in a couple of years," which would be over $1300.
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dave_donhoff
16 years ago
Hi Parkejo,

Or should we just get a higher mortgage and not touch our savings? Then we could pay down the mortgage with extra payments or refinance down the road. What would you do?

Definitely DO NOT bury your safety or retirement money into your real estate equity.

This is our third house we would be buying. We are putting down about 50% of the sale of the house and financing the rest. We would not have any PMI to worry with. I know the real estate market is a mess right now. I just don't want to tie our emergency savings into our first mortgage that's all. Just wondering what others have done in a temporary situation.

Here's the decision criterion;

Recognize that real estate equity is a highly risk-vulnerable place to keep your funds you may be counting on for retirement.

How much (what percentage) of your total family net worth is represented in your real estate equity?
Make sure you are not over-concentrated (under-diversified) by having too much of your funds at risk.

Real estate equity gives zero compounded growth, and only benefits you equal to the after-tax simple interest savings of the leverage avoided.

Alternatively, you'll have many diversification options that can provide compounding growth in a tax-sheltered treatment, and in some vehicles you can have "principal guarantees" which assure that you cannot actually lose ANY of your original funds regardless, and in some cases they protect your periodic gains as well.

Manage carefully. Under-diversifying in a risk-asset to "save" a relatively low mortgage interest rate, at the costs of compounding growth and safety, can be very hazardous to your retirement.

Luck!
Dave Donhoff
Strategic Equity & Leverage Planner