Monday, December 1, 2008

Our Response to the Economic Downturn

In response to my post last week about how the economic downturn has affected you, here is how the economy has affected us.

1. We have a 100% financed house on an interest only loan. On the surface, this makes us a pretty high risk, at least from the current lender's perspective. I either had money for a down payment or for renovations. I chose to save on the down payment and monthly payments and put the money into renovations instead. A lot of people did this. I knew the housing market was souring, but I didn’t plan on making money on the house. I've only planned on learning how to renovate a home and hopefully be able to get out what I've put into it. Thus far, the money used for renovations has come from our bank accounts without the use of any loans. The debt we are currently carrying is some credit card debt, but no loans from other sources.

2. I had enough money for the kitchen renovation, but was planning on refinancing after this was complete and pulling out equity in order to fund the rest of the renovations. The economy fallout had begun, so I am not sure I would have been able to pull out the amount of money I needed. While I had put a lot of money into the house, refinancing has a lot of fees associated with it and the banks were no longer offering 100% financing. While I had effectively put a 20% down payment back into the house with the kitchen and downstairs bathroom renovation, the banks were moving toward 90% loan to value ratios and with refi fees I feared I wouldn't get back enough money to complete the renovation. I decided to finish the upstairs and refinance when the house was mostly done. The timeframe I made this decision was about the time the blog began, early this year. I am not sure this was the best decision to proceed on without refinancing, and it has caused a considerable amount of stress on us, but it's the path we have chosen.

3. The houses on both sides of me are both in trouble. One is in foreclosure, and the other one was in foreclosure (though I am not sure what state it is now). They are both rehabbed, though both not done particularly well. I am not certain what effect this has on me yet. It can't be good. The renovations I have made vastly exceed the quality of work in these other houses, but I am acutely aware that I could be overbuilding for the market. I am hoping that by doing a lot of work ourselves we will get most of the money out that we've put into it, but since we've paid cash out of hand for renovations thus far we are already invested. This means if we do move, we may not make much money but at least we most likely won't need to come to the closing table with a large check in hand.

4. The Queen's name is not currently on the mortgage. I've been waiting to refinance to do this, but renovations always take longer than expected (especially for such a large project like ours). I can't refinance until the house is almost done, as we want to be SURE that we have at least 20% of the home value into the home to avoid PMI and looking like we are high risk lenders.

5. What brought home the credit crisis to me was when I applied for a loan for the foundation work in the basement. Since the Queen's name isn't on the mortgage, I had to be the one to take out the loan. The loan was only for $2k. I was shocked when I was denied. My credit score is good (greater than 750), but I suppose the credit card debt coupled with a 100% financed interest only ARM made me too much of a risk for the loan. Also, without her being on the mortgage, from a credit perspective they don't see her as officially contributing to the mortgage thereby making it look like I am really in a bind. We found the money for the foundation work, but we would have liked to have a bit more cash on hand to continue with other work.

6. We seriously consider what renovations will really provide a return on investment. This pattern of thought has led us to do much of the work ourselves. Another example of potential cost/scope cutting is for us to reconsider digging out the basement to increase the height. It currently is about 6.5' of height, below the minimum 7' height for a habitable space. While we'd like to dig it out, a preliminary estimate (which is probably high) quoted us $45 a square foot to dig the space out. We'd only like about half of the space dug out, but this would still cost around $13k just for the dig. Add framing, electrical and moving things like plumbing and gas lines and the price only goes up. Now we're looking at just making the basement into a nice space without digging out. While it may not be perfect, it could work for a man cave. Other places that we talked about to save money on is the backyard. While I'd love something I planned out previously, it may just be overbuilding.

Going forward money will always be on the mind. While we'd love to make the house perfect, there is a point where it just has to be good enough. Finding that happy medium is the difficult part. Hopefully the money issues will work out OK in the coming months, but we are still proceeding on to finish what we’ve started. We have accepted that we are taking on short term debt, but feel that we are most of the way there and need to finish the main and second floor completely from a livability and a refinance perspective.

The next post I write will have pictures. Lots of pictures, because looking at all these words is boring me to tears.


Anonymous said...

First, thanks so much for blogging. As a fellow Baltimorean, it's so nice to see something positive happening in the city. Your house is beautiful, and your renovations are incredible.

Second, I would consider investing in digging out the basement. It might make a big difference if/when you sell; I think one of the side-effects of the economic situation is going to be a major increase in multi-generational family living arrangements, and having a basement apartment would really add value. Just my two cents!

Ben said...

Dude. I feel your pain. We are on hold for doing any big renovations and are left with the pure DIY stuff and loose ends. Now that winter is creeping his head around the corner - it makes it harder to do (cold, no sun, you get it).

It's also a little depressing thinking about the downturn in real estate and investing money in a house at this time. It's not like we plan to "flip" the house - but I want to make sure when we sell we don't think "Well, we could have rented and saved about 4,000 headaches and workhours" if we have to head to the table with a payment.

But, life's a gamble. I enjoy playing the game - just not when the times are this tough.

Jessie said...

This is a good post. We redid our kitchen with money from savings and a little from our Home Equity Line. I still panic about whether or not we should have used our savings. We didn't deplete our entire savings, but its hard to know what is the correct thing to do.
Where is my crystal ball when I need it!

casacaudill said...

Like you, we took out a 100% financing loan to buy a wonderful house that needed some work but had amazing potential. We saved the money from the sale of our loft to make the repairs this house would need. On paper we look high risk, but we're a DINK household making a pretty decent wage, so I'm not worried about the fact that we have an ARM. At least I'm not worried right now.

We put in new electrical, new windows, new appliances, insulated the attic and added in a new water heater (when ours stopped working). If I had unlimited funds I'd probably fix the foundation so that it's more earthquake resistant, landscape the backyard, fix the crumbling drive way, paint the house and remodel the bathroom. But those are all "nice to haves" not "need to haves" so we live with them.

And the thing is ... I love my home. Even if I'm not making money on it, I thoroughly enjoy living here. It's my house.

The Founding Father said...

"Man Cave" was a term invented by the HGTV network. Find out the real deal at

Be A Man.

- The Founding Father

Laura-Jane - Whimfield said...

I don't really know as much as I should about the topic of the economy as it stands today... But I do understand stress, and it sounds like you two are dealing with a lot of big decisions here!

This sounds very wise and like a good stance to take: "I am not sure this was the best decision to proceed on without refinancing, and it has caused a considerable amount of stress on us, but it's the path we have chosen."


RehabOrDie said...

I just note that some lenders are offering 30 year loans at 4.75% right now.

That's pretty cheap.

If you can get to the point of "nearly done", you could be able to greatly improve your position next month.

You might want to talk to an appraiser or maybe the appraiser that the banks you like uses. Most of them are really decent sorts and can let you know what they need to see.