Wednesday, January 28, 2009

How Much Equity to Take Out?

Since we locked our 5% refinance rate in early December we've been working hard with the intent to pull some equity out of the house. Our hard work has paid off, and the appraisal came back with a value of $5,000 greater than what we were hoping for. All in all we've probably broken even through all of the renovations, but we love the house, and we've learned so much in the process that it has all been worth it.

Since the appraisal is done we're in the enviable position to take out more money than we currently need. We'll be using our equity to pay down credit cards that were used to buy reno materials, and putting some money away to deal with the backyard and keeping extra cash ready for when the HVAC system goes. Beyond this, any money we take out could be used for whatever we want.

The bad news is that we are going with an FHA mortgage, and our mortgage will be above the .78 loan to value ratio after taking out the money for credit card/yard/hvac. This means that we'll have to pay PMI on the money we take out. Any additional money we take out, is just more PMI.

I'm torn. Do we take out a little extra money now, or do we take out only what we need now since the interest rates are low. While I know the more fiscally responsible answer, if you had the chance for the money now, would you take it?

13 comments:

ethan@OneProjectCloser said...

I'm not expert, but I'd try to avoid / limit PMI payments. That's really great that your house appraised so well! Keep the posts coming cause I'm really interested to see what happens.

rehabordie.com said...

Here's my read, as a financial guy who's also in about the same boat.

Avoid PMI if you can. I suspect that it's about the price of the interest on a credit card payment, actually. Do the math yourself to confirm.

Here's the thing: credit cards are a "now" expense and an ongoing risk to both cash flow and your credit rating. SO, pay them off and if it kicks in a little pmi, so be it.

HVAC may or may not go for quite a while. You can use the credit card to pay for that, in a pinch. And you might want to start sniffing around for deals, maybe from builders or HVAC guys in a pinch. You might be able to fund this from cash flow or savings over the indeterminate period before you actually need the unit.

The yard, alas, is probably something you should fund out of current cash flow, if it avoids PMI. Unless, of course, it increases your home's value by a lot (probably not).

Of course, this all goes by the wayside if the HVAC is horribly inefficient and if the back yard is just driving you so nuts and will require a big nut to enjoy. Quality of life is part of what owning a home is all about. If you're miserable with the back yard for years because you don't have the cash flow to fix it, then it may make good sense to finance. You can also pay down principle in order to get out of pmi more quickly (which would be my second choice).

Suze (NOT!)

Anonymous said...

In this economy, I'd take out just enough equity to pay off the credit cards, then use cash only for future renovations (after putting aside a cushion of savings). You've put so much work into the house, it would be a shame to risk it by taking on maximum debt. You need to have something to fall back on if one or both of you becomes unemployed for a while. This recession could be a rough one.

Anthony said...

Glad you had a great appraisal! We are in a similar situation at our house. We're in the refi process and have been debating how much to take out. My one stipulation is to NOT have to pay a PMI each month. It is just a lot of extra money to be spending unless it's absolutely necessary like 'Suze' said.

We are locked in for a 4.875% with, I believe, the same company you guys are going through. We didn't have as much luck as you did with the appraisal though. Our loan officer simply thinks that the woman who came out to do it either 1. just didn't know how to do her job because the number she came back with is THAT ridiculous (nearly what I paid for the UN-renovated house 3 YEARS ago) or 2. that she somehow mixed up her notes and was not accurately assessing the house. Our Loan officer ordered another appraisal to correct it-it just puts our closing date back and I'm back to re-scheduling work we were counting on. I seriously can't wait for it to end!

Good luck with the decision.

Corey said...

Hey Anthony -

The first appraiser assigned was a moron that said square footage was the only thing that mattered. He was fired before he even showed up. They found a better person, Matt (or Mark) Cohen. He was great - see if you can request him.

Also, since my mom works for the company I may be able to get you a discount. Send me an email in a comment (you can then delete the comment so it isn't published) and I can email you details. For me, this discount was a $599 rebate.

momnipotent said...

Congratulations on the great appraisal. Here’s a Mom’s perspective, from the experience of owning 8 houses in 6 different states. We had PMI on our first house, and avoided that at all costs on subsequent houses; PMI is BAD JUJU. Also, just because the house appraised that much doesn’t mean that is what someone would pay for it right now. Home prices are still going down.

Another good idea is to try to establish an annual budget, and try to live below your means. Figure out where the money is going. I remember the first 6 months after Leigh bought her condo. She minimized all expenses and was very careful with her spending. Pay off the credit cards as quickly as possible. Taking money out to pay off credit cards is fine, but taking money out for future expenses makes it more tempting to buy things on impulse.

Think about how many more permanent improvements you want to make there, how long you would probably live there, and how much more money you want to put into the place. Eventually, you WILL sell it.

Corey said...

rehabordie - You bring up excellent points, that we are now considering. Thank you for the well thought out reply!

There sure is a lot of number crunching to figure out the best "deal". :-)

Anonymous said...

I think momnipotent gave some excellent advice (probably why she's the momnipotent!). I'd only add, don't take out money to pay off the credit cards UNLESS you are disciplined enough not to run them up again (yes even for more reno). I've seen way too many people roll their credit card debt into their home only to max out the cards again.

Mark said...

Anon,

I hope that went without saying to this cute couple, but as a public service to noobs and others who might be reading to learn a bit about home finance, this is probably worth saying.

So, for those who don't already know:

Credit cards are designed to part you from your money. They are really only a tool to be used very sparingly, and preferably only to up your credit score. Credit card companies are evil. They have devious policies that can trash your credit score and liquidity in a blink.

Some even track your purchases and use that information to cut your credit and damage your credit score. I just read about this today. "behavioral scoring" or some such hooey.

So, get rid of that CC debt and hide the cards and don't use them save one that you keep a small balance on and that you "auto-pay" so you're never late. This will keep your score up, even though you could technically be debt-free.

And while I'm at it, if a reader is thinking about buying but doesn't have great credit, I strongly urge you to check out this web site:

http://www.creditinfocenter.com/repair/Repair.shtml

In six months to a year you can dramatically improve even pretty lousy credit.

You'd be surprised at how much erroneous stuff is on many folks credit reports, too.

EXIT DIDACTIC MODE

:)

Anthony said...

Corey,

Glad to hear that we weren't the only ones with a bad appraiser experience. My email is anthony.cataldo@gmail.com. We are using Quicken Loans, just to make sure it's the right company. Any rebate would be a great one, so thanks for passing it along!

Ben said...

Hey Corey,

We also refied just a few days ago. My advice - leave all the money in the house you can for right now and avoid the PMI payments. Because the last thing anyone needs is more payments, right? It's pretty tempting to have cash in hand, but just think of it as being in a savings account.

Ben

HomeImprovementNinja said...

Well, normally I like to have as little debt as possible. but...

1) home equity debt is tax deductible, so it reduces your borrowing costs

2) with the way the dollar is falling (printing too much to pay for iraq war and bailouts), borrowing money at fixed rates in today's dollars and paying them back in future dollars is probably not a bad idea.

rehabordie.com said...

HIN,

Good points. Strategically, it's better to borrow now than at other times, IMO. It's just not great.

Nonetheless, owning a tangible asset (at the right price) on credit at historically low rates, when the Feds are spending like drunken sailors...well, let me put it this way, you will be losing value in savings, longer term. Also, it's best to lock these low rates while we can. CC rates will go higher. Don't put yourself at their mercy if you can help it.

I guess it comes down to some sort of a strategic vs. pragmatic mix.

Mark