Determining home equity loan value

[Sigarms]

Apologies, I've tried to find the thread I thought I started on looking for a new home, but can't find it. I hate to start something on the same subject...

Wife and I are on a 5 year plan to sell our current home and retire in the "house we'll die in".

In the thread I was looking for, someone talked about a bridge loan.

Wife and I have figured that to find our "perfect home", we're probably going to have to buy and then put our home on the market. We found a almost perfect home, but it was just to close to a busy road that I'm familiar with (rural two lane, use to be the state route rd, then they built a new one, and this was the "old route" road now and people drive like idiots on that road and home was just to close to that road for our comfort zone).

We decided that if a perfect house comes along, we want to see where we stand with finances, so we called our credit union to inquire about a home equity loan.

An appraiser came out and appraised our home on 6 acres.

Wife and I have excellent credit. Our only debt is what we pay in taxes, and in our rural area, it's really not that much in our opinion (the credit union verified everything is paid off).

Since we're empty nesters and no dependents, our current annual salaries combined comes out to 1/3 of the appraisal of our home.

We're figuring to find a perfect home (I know no such thing) we'd have to find a home worth about no more than 80% of the appraised value of our home given todays market (and what we'd feel comfortably buying).

Well, the credit department came back with a home equity line of 59% of the appraised value of the home, which I honestly thought was kind of low.

Now, I understand an appraisal is nothing written in stone, and what something is worth today may not be what it's worth next month in the reality world. That said, the house will actually be sold with 37 acres and not 6 acres. Even if I charged 5K an acre (which I think would be a pretty good deal as that's about the price I paid for it given the rate of inflation), that's an added 150k onto the sale price of the house with 6 acres.

Is it normal for a home to be paid off to only be worth an equity line of 60% of the home if it is paid for outright? The credit union verified our salaries and they also know we have a good chuck of change with them on a couple of CD's.

I did talk to my other credit union where I've been a member for over 25 years. Talked to a guy from Texas who seems like this isn't his first rodeo. He said he thought it sounded low, but he doesn't have all the details.

He told me to ask them

1 - What is the load to value you have set your terms at?
2 - What debt to income are you setting me at?

Per the credit union we went to, per our loan, the interest rate is prime minus 0.25% (currently at 7.25) with a minimum floor rate of 3.99%, and your minimum payment is between 1%-1.6% of your outstanding balance each month depending up your rate.

Reality is we wouldn't need to access the money until we actually find a home, and that could take a couple of years, which of course means the reality market could change substantially.

Any feedback or insight would be appreciated (and sorry for a second thread).

 

[plowhog]

You are in the strongest position if you sell your current property independently of trying to tangle it into the "next purchase" and juggle two properties at once. It would be hugely convenient for *you* to juggle one into the other, presuming everything went perfectly, but the reality is lenders are not looking to make things hugely convenient for you, they want to loan money and make interest.

You are also in strongest position if you have already sold, and have banked the money, and are a cash buyer. When you tie one transaction into another you set yourself up either for a really good payback or a really problematic result.

There are many circumstances at play I am not knowledgeable about-- but I'd suggest selling first, then renting or leasing a place in the market where you know you want to buy. While you are renting or leasing, you can shop at your leisure then bag the perfect property, when it comes along, using the cash from your sale.

btw, I am sure it is done, but I have never experienced someone using a home equity loan to raise money to buy their "forever home." Not that it can't be done, but-- what is the easiest, most simple path that puts you in strongest position without risking a lot of headaches?

 

[ning]

A home equity line isn't the same as a "first mortgage", though in your case (you own outright) they appear to be the same.

You should check to see what a normal "first mortgage" would be.

 

[dstig1]

btw, I am sure it is done, but I have never experienced someone using a home equity loan to raise money to buy their "forever home." Not that it can't be done,

Pretty much what I did. We owned our previous home free and clear and I then took out a first mortgage on it to help finance the new house build. Then paid it off when we sold it and moved in. Now that was a first mortgage and not a HE loan, but same principle.

Sig - did you ask the CU about a bridge loan for the new place? They generally run for a few months and you pay interest only. They can often be extended a few months but there is probably a cap on how long. Then when the old place sells, you can then convert into a conventional mortgage or pay it off.

But if you own your house free and clear, all you would need to do is get a normal mortgage on the new place. Then when the old place sells, you either pay it off, or pay off a large chunk of it, and then continue paying like normal until gone. Bridge loans are for when you are carrying a mortgage and now need to carry 2 mortgages for a relatively short time. It doesn't sound like you need that.

 

[Sigarms]

A home equity line isn't the same as a "first mortgage", though in your case (you own outright) they appear to be the same.

You should check to see what a normal "first mortgage" would be.

I'm assuming that since we already had a mortgage on our current home, another mortgage would still be considered a "first mortgage"?

I actually thought about that just to see what we would qualify for as well. Since the credit union has ALL of our financial info, kind of surprised they didn't mention it. Need to ask.

 

[Sigarms]

Sig - did you ask the CU about a bridge loan for the new place? They generally run for a few months and you pay interest only. They can often be extended a few months but there is probably a cap on how long. Then when the old place sells, you can then convert into a conventional mortgage or pay it off.

No, did not ask, but will.

Thing is, since we are not in a rush to sell or buy, we're kind of being particular about our final home.

I am thinking though that since we have no set time limit to complete this process, I'm curious how long the bridge loan would be good for.

Our plan was something along the lines of what you did. The only issue is that realistically I'm not certain if the equity amount the CU gave us is going to be enough from what I'm seeing in the current market. I'm just making up a number, but assuming your home is appraised at 100K, it's paid off and your gross income around 35K annually along with having 20% to put down on the home (based on your 35K annual income), I'm just surprised the equity amount was 59K on the home that your appraiser came in at when the home is paid for. I guess the worst thing that could happen however is that the market crashes and you have to sell for a huge loss and the CU has to account for that possibility.

I did laugh with the appraiser and like him. He asked me where I was from because of course I don't have a southern dialect. Told him kind of all over the place but did mention New York. He looked at me surprised and asked if I ever lived in New York City. I told him no way would I ever live there. For some reason he thought anyone living in NY lived in NYC. I'd like to think he's getting over his line of thinking on Damn Yankees because he said I'm the second nice guy he's met from NY, although I corrected him by saying I considered Pa my "home state" because that's where my family is from and where my dad retired at when I was a teen growing up.

 

[Sigarms]

You are in the strongest position if you sell your current property independently of trying to tangle it into the "next purchase" and juggle two properties at once. It would be hugely convenient for *you* to juggle one into the other, presuming everything went perfectly, but the reality is lenders are not looking to make things hugely convenient for you, they want to loan money and make interest.

You are also in strongest position if you have already sold, and have banked the money, and are a cash buyer. When you tie one transaction into another you set yourself up either for a really good payback or a really problematic result.

There are many circumstances at play I am not knowledgeable about-- but I'd suggest selling first, then renting or leasing a place in the market where you know you want to buy. While you are renting or leasing, you can shop at your leisure then bag the perfect property, when it comes along, using the cash from your sale.

btw, I am sure it is done, but I have never experienced someone using a home equity loan to raise money to buy their "forever home." Not that it can't be done, but-- what is the easiest, most simple path that puts you in strongest position without risking a lot of headaches?

I agree with your assessment to sell first, then buy with cash outright. In a perfect world, we'd have the cash outright to buy and then sell, but we consider ourselves blessed as it is without having a house/land payments and to have this problem to begin with if that makes sense.

Both my wife and I are however not to keen on moving 2 times by selling and renting. With 2 dogs and 2 cats along with work, then if we rent we're still looking for a place and moving again.

 

[dstig1]

I still think your simplest solution is to 1. find what you want. 2. Buy it. 3. Get a mortgage on it. 4. Go prep and sell the old place. 5. When it closes, pay off the mortgage with the proceeds.

This is the normal way people buy houses, so you aren't looking for some exception to the rules. That makes it easy. Just make sure the mortgage allows pre-payment without penalty, but nearly all US mortgages allow it so it is almost for certain, but you don't want to be caught in the tiny minority that is different.

Being a native Upstate new yorker, I get that same thing all the time. "I'm from NY. You don't have an accent! Not that part of NY... I'm from the part that is almost in Ohio..." It is pretty universal that people not from NYS think NYC when they hear new york.

 

[Sigarms]

I still think your simplest solution is to 1. find what you want. 2. Buy it. 3. Get a mortgage on it. 4. Go prep and sell the old place. 5. When it closes, pay off the mortgage with the proceeds.

Honestly, after thinking about it, I think you're right.

What I'm kind of surprised at and honestly a little irritated with is why the CU didn't steer us in that direction when we told them our plans.

Wife hasn't been home in a couple of weeks due to a surgery her mom had, but coming home tomorrow (along with mom) and we can talk about it more in person.

Don't you know when you're from upstate NY, you're from the Catskills?

 

[sandman2234]

Three years ago, we bought the house and property across the street. We had paid our house mortgage off, so I went to the credit union and asked for a new mortgage on our house. We took the proceeds from the loan and purchased the house across the street with cash. When and if we move across the street, we will sell our house and whoever buys it can pay off the existing mortgage (if there is one, since the balance is at $5K right now). I had to quit making advance payments on it because there was an early payoff clause that made me have to repay closing costs if the loan was paid off in less than 3 years. With the 2.75 % mortgage, I am now not in a hurry to pay it off, just leave my money in the bank drawing interest that is more than that!
David from jax

 

[Kavenwire]

I ran into a similar thing a while back—talked to my bank and they only looked at the most recent appraisal too, not the county value. I ended up chatting with someone from fast property finance Staffordshire and they gave me some ballpark figures based on nearby sales, which helped me figure out what I could actually borrow before spending money on an official appraisal.

 

[MossRoad]

To be clear, are you talking about a home equity loan, or a home equity line of credit?

 

[EscapedSuburbia]

I still think your simplest solution is to 1. find what you want. 2. Buy it. 3. Get a mortgage on it. 4. Go prep and sell the old place. 5. When it closes, pay off the mortgage with the proceeds.

This is what we did earlier this year.

Selling your house first then buying another may be the best financial decision since it avoids paying interest but it's pretty impractical. It took us over a year to find our current property. If we'd have sold our house first we would have needed to store all our stuff and pay rent for over a year. Plus even after we moved to our new place it took a couple months to prep the old place for sale - paint, carpets, small repairs all take time and are hard to do properly when all your stuff is in the house.

Just get a conventional mortgage, buy your new place, sell the old place and pay off the mortgage.

 

[stucknutz]

This is what we did earlier this year.

Selling your house first then buying another may be the best financial decision since it avoids paying interest but it's pretty impractical. It took us over a year to find our current property. If we'd have sold our house first we would have needed to store all our stuff and pay rent for over a year. Plus even after we moved to our new place it took a couple months to prep the old place for sale - paint, carpets, small repairs all take time and are hard to do properly when all your stuff is in the house.

Just get a conventional mortgage, buy your new place, sell the old place and pay off the mortgage.

Couldn't agree more. This is what needs to be done!

 

[quicksandfarmer]

Honestly, after thinking about it, I think you're right.

What I'm kind of surprised at and honestly a little irritated with is why the CU didn't steer us in that direction when we told them our plans.

Wife hasn't been home in a couple of weeks due to a surgery her mom had, but coming home tomorrow (along with mom) and we can talk about it more in person.

Don't you know when you're from upstate NY, you're from the Catskills?

When you go to a muffler shop, you're going to get a muffler.

If you call the bank and ask about home equity lines, you're going to get passed to someone who sells home equity lines.

As others have said, buy the house with a conventional first mortgage, primary residence. That gets you the best rate. Then sell your existing house. If you need money for the down payment on the new house or to fix up the old house for sale, use a home equity line for that.

 

[ultrarunner]

Bridge loans serve a purpose and not all that unusual but often are private money and not institutional.

Typical is you find the perfect property and realize act now or loose it but you also need to sell the current home.

My brother has 4-5 of these in a year and not once an issues other than bridge loans come at a price but for short term can be well worth it.

Don’t overlook the possibility of seller financing… I’ve bought a few this way… some just needed work and two were sellers retiring and looking for income stream better than CD rates.

 

[Sigarms]

To be clear, are you talking about a home equity loan, or a home equity line of credit?

Home equity line of credit.

Wife also fell in love with an older place (built in the early 60's). Single level, 1,650 sq ft with an unfinished basement. Came with close to 4 acres, and we're going to be having a lot of work done on it.

The price was right, and figuring on what we need to sink into the new place, it can be done. Game plan is move in January / Feb, do some upgrades on the current home (due to the appraised value just so it doesn't look like we lived in it for 20 years lol) and put it on the market. Our current home is kind of unique to the area with house size and land, so time will tell.

I wasn't as enthused as my wife about the "new" home, but she has always had a better vision than myself when it comes to the future, and the more I go over there (about 20 minutes away from our current home, but in the same county) the more it's growing on me and I'm starting to see what she is seeing on what it can become.

 

[riptides]

...

I wasn't as enthused as my wife about the "new" home, but she has always had a better vision than myself when it comes to the future, and the more I go over there (about 20 minutes away from our current home, but in the same county) the more it's growing on me and I'm starting to see what she is seeing on what it can become.

yeah, my wife had vision. All I saw was work. We joke to this day what we said to each other when I first set foot on our place. Our real estate friend refused to show the place to me.

All turned out really well. I am sure your new place has potential for the same.

 

[Sigarms]

yeah, my wife had vision. All I saw was work. We joke to this day what we said to each other when I first set foot on our place. Our real estate friend refused to show the place to me.

All turned out really well. I am sure your new place has potential for the same.

After we signed for the new place, I wasn't getting much sleep at night because I was worried what could go wrong LOL

My wife said something to me which is one reason why I married her... Long story short, she brought God into the equation which I didn't. I get it, if you don't believe in God, I could be a fool, but the reality is financially we can afford what we're doing, but we are incurring debt doing it, and I HATE debt. However, no different than when we bought this place 20 years ago with the stress of debt, and in reality we are in a better position now vs 20 years ago since this house is the only thing we are in debt on, but that debt should be gone in the first quarter of next year after we sell our current home.

It's going to be nice in a much smaller home along with an unfinished basement for storage for just the two of us. With just us.

I think the house we bought would have been perfect 20 years ago, but the reality is our current home worked out perfect with the boys and my dad living with us along with all of our animals and pets over the years and this new house could never accomplish that.

 

[ericm979]

It's great that you found a place that you like! The debt part is scary but hopefully it'll be over relatively soon.