Home building: cash for down payment vs. paying down lot loan | TigerDroppings.com

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GeauxldMember
LSU Fan
NOLA
Member since Nov 2003
2246 posts

Home building: cash for down payment vs. paying down lot loan


My sister and her husband just bought a lot on which to build their future home. She approached me with this scenario and asked my opinion: she has the ability to pay her lot off in full in 30 months and use its value toward the mortgage, or she can choose to make minimum payments for 3-4 years and continue to hold on to the surplus as cash to put down on the mortgage after construction.

I said I would likely opt to keep the cash on hand,as it provides more flexibility, but thought I'd throw it out there for other opinions.

Facts as relayed to me:

- Appraisal value = $65K
- Loan balance = $37.5K, 6% for 180 months w/ balloon balance due @ 5 yr. maturity.
- She plans to build in 3-4 years
- Surplus, i.e. home savings minus loan payment is approximately $1050/month ($25K over 2 years, $38K over 3 years, $50K over 4 years)

What would you advise?







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ATOlurker
LSU Fan
Lafayette
Member since Sep 2005
197 posts

re: Home building: cash for down payment vs. paying down lot loan


We are in the same process. As long as the lot will really appraise for the full value then I think she should pay off the lot.

The equity in the lot will still be part of your 20% down payment. Either way at the end of construction everything will be part of a single mortgage with one appraised value.






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Chris4x4gill2
Alabama Fan
North Alabama
Member since Nov 2008
1994 posts

re: Home building: cash for down payment vs. paying down lot loan


I would most likely hold onto the cash, use it to help finance building the house and roll the lot loan int othe mortgage at the end.





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GeauxldMember
LSU Fan
NOLA
Member since Nov 2003
2246 posts

re: Home building: cash for down payment vs. paying down lot loan


I get that, and from a pure numbers standpoint, so long as the property value doesn't go to crap, paying off the loan makes sense. But a lot (no pun intended) can change in two or three years, and compared to the amount of interest saved by paying off the lot, I think having that cash on hand would win out for me.





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Who Me
LSU Fan
Ascension
Member since Aug 2011
5566 posts

re: Home building: cash for down payment vs. paying down lot loan


It's always nice to have that extra cash for the building process.





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guttata
LSU Fan
prairieville
Member since Feb 2006
20053 posts

re: Home building: cash for down payment vs. paying down lot loan


I just did that. I purchased my lot in 08'. Paid on the lot till Feb of this yr. I owed $20k when we started construction. We just finished our build in Aug. and switched from a construction to permanent financing last week.





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TigerHunt
LSU Fan
Covington
Member since Feb 2005
19 posts

re: Home building: cash for down payment vs. paying down lot loan


I would pay the lot off to $100 to keep the mortgage in place for when it comes time to build. She will build her cash back up monthly with what she would have be paying towards the lot? Where is the lot located?





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GeauxldMember
LSU Fan
NOLA
Member since Nov 2003
2246 posts

re: Home building: cash for down payment vs. paying down lot loan


It's on the northshore.

I'm assuming you're saying you'd keep the lot loan in place to benefit their credit score for when it comes time to make a construction loan?

I just looked at the amortization table on the loan in question, and it looks like if they did what you suggest, they'd save around $1200 in interest over 2 years and close to $3000 over 3 years. Correct me if I'm wrong on that count.






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TigerHunt
LSU Fan
Covington
Member since Feb 2005
19 posts

re: Home building: cash for down payment vs. paying down lot loan


By keeping the $100 in place keeps the banks mortgage/ Lien in place so you don't have to back to title co. If your mortgage happens to get canceled. So when it's time to build your mortgage with bank in still in place. What bank is she with?





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