My wife is putting up a fight on what I think is a pretty obvious solution. We are looking to put our house up for sale but I need a new roof, window and door replacements, new laminate flooring and possibly some updates to the kitchen. These are things that will drastically improve our selling ability in such a poor market.
I suggested taking a home equity loan of roughly $10,000, our house appraisal is at 220,000 and our mortgage remaining is 163,000. I won’t get back the full $10,000 but I can get a lower interest rate than our 19.9% on our credit cards and I can deduct the interest paid.
My wife has a warped way of thinking and doesn’t want the home equity Loan because it reduces the amount of money we would collect at selling. My point is that it is better to pay it all off at selling and have less money in our pockets than to carry that cost on our credit cards which already have 2,500 on it and the 19.9% interest.
Am I missing something or should I just remain the household financial adviser?
That credit card debt will directly reduce the amount of monthly Mortgage payments you will qualify for.
Along with increase your debt to income ratio.
So it’s a wash out.
The interest rate is what you need to focus on.
Either way it will reduce the cash for your new home.
Plus, credit cards are revolving credit – much more derogatory for your credit reports
Also, any time you use more than 30% of your available credit limits on your card you are reducing your score.
Installment loans such as HELOC’s do not have this effect on the score.
It’s the revolving debt – credit cards – that will do the most damange to your credit rating.
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Jul 22
July 22nd, 2010 at 10:39 pm
No, you are doing it right. She just can’t see that it’s all the same money — yours. It just depends on how much you want to pay for it. I would not want to pay 20 percent interest either. Tell her also that when the house sells, that loan also reduces your TAX liability for the sale of the house. If that actually applies to you in this case, I am not sure.
References :
Me. I’ve bought and sold houses and also worked as a real estate broker for 12 years. I like helping people save and make money!
Oh, and here’s another point. A friend of mine took out a home equity loan to buy a car with. He paid the loan off but was able to deduct the interest on his taxes. You can’t do that with a regular car loan.
July 22nd, 2010 at 11:10 pm
Riptide,
Your brain is working correctly. I’d take your approach.
References :
July 22nd, 2010 at 11:42 pm
That credit card debt will directly reduce the amount of monthly mortgage payments you will qualify for.
Along with increase your debt to income ratio.
So it’s a wash out.
The interest rate is what you need to focus on.
Either way it will reduce the cash for your new home.
Plus, credit cards are revolving credit – much more derogatory for your credit reports
Also, any time you use more than 30% of your available credit limits on your card you are reducing your score.
Installment loans such as HELOC’s do not have this effect on the score.
It’s the revolving debt – credit cards – that will do the most damange to your credit rating.
/
References :
July 22nd, 2010 at 11:49 pm
Your wife is wrong or confused. If you have to pay the credit card off at the time of Closing, that is not different than if you have to pay the Home Equity Loan off at closing. And, surely you don’t to carry the $10,000 on your credit card at 19.9%!
Perhaps your wife is not doing enough financial work on your joint spending and finances, so she isn’t learning by experience. Sit down together and work on the monthly budget, financing issues, home sales and updates plan like this one together on paper, so you both see how it works out.
References :
July 22nd, 2010 at 11:54 pm
Your math is shaky from the get go.
You plan to add $10K to the cost basis, but NOT $10K to the sales price. Therefore, you will lose part of the $10K plus whatever the interest expense is in the meantime (getting a tax deduction does not make this free money). You are gambling that with the improvements you can sell the property at all, rather than not at all at a lower price.
Having decided to spend the money, then the question is where to get the money. Savings would be best, lower interest rate second best.
However, getting a HELOC often involves *more* than just signing paperwork. if you have to pay for an appraisal, points or closing costs and then sell in 6 months, you will spend a lot more than the difference on interest using a credit card.
References :