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Started By
Message
Home building: cash for down payment vs. paying down lot loan
Posted on 10/1/12 at 3:29 pm
Posted on 10/1/12 at 3:29 pm
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?
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?
4
Posted on 10/1/12 at 3:35 pm to GeauxldMember
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.
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.
Posted on 10/1/12 at 3:36 pm to GeauxldMember
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.
Posted on 10/1/12 at 3:49 pm to ATOlurker
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.
Posted on 10/1/12 at 6:48 pm to GeauxldMember
It's always nice to have that extra cash for the building process.
Posted on 10/1/12 at 8:01 pm to Who Me
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.
Posted on 10/1/12 at 8:29 pm to GeauxldMember
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?
Posted on 10/1/12 at 8:50 pm to TigerHunt
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.
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.
Posted on 10/1/12 at 10:47 pm to GeauxldMember
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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