Hey, I have another newbie mortgage question. If I'm lucky enough to find a house that lists for less than what it is actually worth, what is the best way to get the equity out so that I may be able to spend it on the house? Getting a loan for a higher than purchase price doesn't seem right because I'll be paying on it for a looooong time, and interest will get me in the end. So is an equity loan the way to go right off?

Help! :scratch

A little help here.

Home equity or a home equity line of credit (HELOC) The HELOC is more convienant. You get a checkbook and can use the money as you need it instead of getting an equity loan which gives you a lump sum. You can pay off the HELOC and have it sitting there ready and waiting for the next time you need to use it. Minimum monthly payment is usually 1% of the balance.
You can still write off the interest, but the interest is usually a variable rate.

Home equity or a home equity line of credit (HELOC) The HELOC is more convienant. You get a checkbook and can use the money as you need it instead of getting an equity loan which gives you a lump sum. You can pay off the HELOC and have it sitting there ready and waiting for the next time you need to use it. Minimum monthly payment is usually 1% of the balance.
You can still write off the interest, but the interest is usually a variable rate.

x2

This is how most people do it. I work at US bank and there helocs are awesome as far as rates and service. After you close on a house with equity give it 30 days and then go and apply for one. You gotta have good credit thought. Heloc's are a bit tougher to get than just your standard mortgage loan.

I don't even understand your question. Are you saying that because you are going to buy a house below assessed value you are going to get a second mortgage so you can fix it up? Is that the plan?

I don't want to whip you too hard on this plan, but that's EXACTLY the sort of transaction that's got so many homeowners broke, desperate and unable to sell OR refinance. Turn off HGTV's "Flip that House" or "Property Ladder", burn your Carlton Sheets tape set and move on with your life until you're in a financial position to be a real estate investor. Sorry to be so blunt, but doing exactly what everyone else is doing will get you exactly where they are.

Somebody had to say it.

I'll have to look into the HELOC, it sounds like the way to go. Thanks guys.

Dorkfish, I'm not trying to flip a house for money, or into some kind of get rich quick scheme. Getting myself into financial trouble isn't on my agenda any time soon. The reason I want the equity off top is to fix the cosmetic areas of the house, and 90% of the work is going to be done by me. I've been paying rent for too long. For the price I plan to get this house for, plus the cost of the home equity loan, I'll still be paying less than what I pay now for rent. Not to mention the fact that this will be my own, and I'll have more livable space, and a HUGE detached garage.

I've never really understood the purpose of HELOCs. So I approach the bank with an application for HELOC and use my equity in the home as collateral for the HELOC application to only pay the HELOC back at interest all the while paying the interest + principal on my mortgage. Now I'm in debt even further - blah blah, interest is tax deductible.

Why does this not make any logical sense to me? What am I missing?

Here are my thoughts (if I have understood all this correctly); Why not use a portion of your principal for your renovations, take the extra hit on payments per month (interest is tax deductible), save additional funds throughout the year and come tax time apply the money saved, plus your return on interest to apply back to your mortgage.

I have to admit that I'm making certain assumptions about your financial situation while giving my feedback :)

I'll have to look into the HELOC, it sounds like the way to go. Thanks guys.

Dorkfish, I'm not trying to flip a house for money, or into some kind of get rich quick scheme. Getting myself into financial trouble isn't on my agenda any time soon. The reason I want the equity off top is to fix the cosmetic areas of the house, and 90% of the work is going to be done by me. I've been paying rent for too long. For the price I plan to get this house for, plus the cost of the home equity loan, I'll still be paying less than what I pay now for rent. Not to mention the fact that this will be my own, and I'll have more livable space, and a HUGE detached garage.

Don't do this plan. Period. Pay for the renovations as you go. Period. Tyg pointed out more of the problems with HELOCs. But the over-arching problem is the modern attitude of "get it now, just borrow the money". And no, you're not PLANNING on having financial trouble any time soon. Neither did any of the people who are having financial trouble. People didn't set out to put their homes in jeopardy running up debt on renovations. But they listened to the "oh, so easy" suggestions of their bankers and real estate gurus who tell them it's smart to "access" or "put to use" or "re-invest" that pesky equity.

Being sick of paying rent is not a reason to buy a house. Houses expose you to all manner of expenses you don't have as a renter. You need to have your financial feet under you before you buy one, or it will become a money black-hole. It sounds like you're not trying to buy a big fancy house, and that's smart. But if you buy a house when you have no money because your broke friends are telling you how stoopid you are for paying rent you are going to live from crisis to crisis with each one of them resulting in more debt.

Don't do this plan. Period. Pay for the renovations as you go. Period. Tyg pointed out more of the problems with HELOCs. But the over-arching problem is the modern attitude of "get it now, just borrow the money". And no, you're not PLANNING on having financial trouble any time soon. Neither did any of the people who are having financial trouble. People didn't set out to put their homes in jeopardy running up debt on renovations. But they listened to the "oh, so easy" suggestions of their bankers and real estate gurus who tell them it's smart to "access" or "put to use" or "re-invest" that pesky equity.



Your confusing issues. Most of the problems in the mortgage market today are from people getting variable rate mortgages on overvalued property. They over paid on the house and now that the variable rates are kicking in they can't afford the higher payments and they can't refinance into a fixed rate loan since the house is worth less than they owe. No bank will lend to them since they're upside down.
HELOC's are good tools if used correctly. No reason to add onto a 30 loan any more than needed. He can use the money for short term to fix up the house, pay a lower interest rate than a personal loan, plus write off the interest.
If he's smart he'll get into a low rate 30yr fixed now and use they HELOC as needed for his investment in his house which will most likely appreciate as soon as he finishes the work.
Now I aggree that a lot of people abuse the system by using their house as an ATM machine and buying cars, vacations, etc. This guy sounds like he has his plan in order. The tools are there and will work to his advantage if he uses it right.
Cash is king, but not always the right option for everyone.

Your confusing issues. Most of the problems in the mortgage market today are from people getting variable rate mortgages on overvalued property. They over paid on the house and now that the variable rates are kicking in they can't afford the higher payments and they can't refinance into a fixed rate loan since the house is worth less than they owe. No bank will lend to them since they're upside down.
HELOC's are good tools if used correctly. No reason to add onto a 30 loan any more than needed. He can use the money for short term to fix up the house, pay a lower interest rate than a personal loan, plus write off the interest.
If he's smart he'll get into a low rate 30yr fixed now and use they HELOC as needed for his investment in his house which will most likely appreciate as soon as he finishes the work.
Now I aggree that a lot of people abuse the system by using their house as an ATM machine and buying cars, vacations, etc. This guy sounds like he has his plan in order. The tools are there and will work to his advantage if he uses it right.
Cash is king, but not always the right option for everyone.

So I BORROW money and use my equity as the collateral? Why jeopardize my equity (your investment) to put in new granite counter tops in my home or a new deck? People with a reasonable sense of mind understand that one day you may run into financial difficulties and being prepared is sound practice. I have a constant emergency nest egg that remains untouched AT ALL TIMES that will cover me for at the very least 6 months. I had nearly 2 months off between contract jobs in the 2007 season and I never once panicked because my funds allowed me to still go on as I please with NO worry (still went out when I wanted and took vacations) - hell my friends worried more than I did because they tied my situation to their own. You always have to plan for the worst case scenario and borrowing in the here and now to perform upgrades is silly. Homes are long term investments, why the rush to upgrade now?

Save the money, perform the upgrades as the funds allow over time. I hate this borrow now to have NOW. Why the need to have NOW if the upgrades are not a necessity? If they are a necessity (your foundation needs repair), then you made a poor buy :)

So I BORROW money and use my equity as the collateral? Why jeopardize my equity (your investment) to put in new granite counter tops in my home or a new deck? People with a reasonable sense of mind understand that one day you may run into financial difficulties and being prepared is sound practice. I have a constant emergency nest egg that remains untouched AT ALL TIMES that will cover me for at the very least 6 months. I had nearly 2 months off between contract jobs in the 2007 season and I never once panicked because my funds allowed me to still go on as I please with NO worry (still went out when I wanted and took vacations) - hell my friends worried more than I did because they tied my situation to their own. You always have to plan for the worst case scenario and borrowing in the here and now to perform upgrades is silly. Homes are long term investments, why the rush to upgrade now?

Save the money, perform the upgrades as the funds allow over time. I hate this borrow now to have NOW. Why the need to have NOW if the upgrades are not a necessity? If they are a necessity (your foundation needs repair), than you made a poor buy :)

Tyg
I'm glad you're doing everything right with your emergency fund. I keep a positive net worth too. This doesn't help with his original question. If you want to pull money out of the house he can use a HELOC. That's all he wanted to know. When he asks how he should set himself up financially, then chime in with all the words of wisdom.

A side note.....when Katrina hit the people with their houses paid off or had large amounts of equity got screwed by having their money tied up with the insurance companies. The people that had a HELOC in place standing by were able to pull all that money with one check and go find another place to live with it. They weren't left at the mercy of the insurance companies with no place to live. Some of them people are still waiting for money from their claim. Cash is king....let the mortgage company battle it out with the insurance.

Tyg
I'm glad you're doing everything right with your emergency fund. I keep a positive net worth too. This doesn't help with his original question. If you want to pull money out of the house he can use a HELOC. That's all he wanted to know. When he asks how he should set himself up financially, then chime in with all the words of wisdom.

A side note.....when Katrina hit the people with their houses paid off or had large amounts of equity got screwed by having they money tied up with the insurance companies. The people that had a HELOC in place standing by were able to pull all that money with one check and go find another place to live with it. They weren't left at the mercy of the insurance companies with no place to live. Some of them people are still waiting for money from their claim. Cash is king....

Well my words of wisdom tie back to ensuring he takes on no additional debt in addition to his mortgage payments + whatever else he may have, and furthermore it's to ensure that he saves for upgrades, even moreso, in case tragedy strikes. That's where I was going with it :)

Quick liquid assets totally rule :)

Quick liquid assets totally rule :)


+1 Exactly

Tyg
A side note.....when Katrina hit the people with their houses paid off or had large amounts of equity got screwed by having their money tied up with the insurance companies. The people that had a HELOC in place standing by were able to pull all that money with one check and go find another place to live with it. They weren't left at the mercy of the insurance companies with no place to live. Some of them people are still waiting for money from their claim. Cash is king....let the mortgage company battle it out with the insurance.

Not to put too fine a point on it, but that is complete nonsense. First off, your insurance company didn't sign the mortgage loan - you did. So acting like it's gonna be the lender's job to get their money from an insurance agency while you're blissfully uninvolved is wishful thinking. But more important is the fact that an emergency of this proportion (wiping out your house) is the absolute LAST point in time that you want to be deeply in debt or worse, going further into debt. Let's examine the scenario you describe: house is gone, but I have a HELOC for say $50,000. So I deposit that Bad Boy in the bank to live on while my insurance pays off. Most homeowners policies are not for "replacement cost", but are for a pre-determined amount. You must stay on top of your insurance company every time your house gets assessed in order for your actual dollar amount of coverage to be somewhere near what your house is actually worth. Assuming you did that, you're still not going to clear enough money from the settlement to pay off the first mortgage and build a new house. Let's say you owe $100,000 on a $200,000 house and you tap your $50,000 HELOC to live on while this all clears. So the insurance company comes through with $200,000. The mortgage company gets $150,000 and you're left with what little is left of the $50,000 HELOC, $50,000 and no house. I think I'm being generous with those figures. Keep in mind that throughout this whole mess, you've been making payments on a destroyed house. Just to add salt to the wound, you're also making payments on the HELOC. Using HELOC money to pay back a HELOC doesn't sound like a "win" in any universe I've ever lived in.

Meanwhile, Paid-Off Mortgage Guy is sitting in a hotel that he's paying for with what used to be his old house payment. When he paid his house off, he re-directed his old house payment into investments. When Katrina hit, he re-directed it again to abnormal current expenses. So the smoke clears and he's standing there with $200,000 to build a new house.

Not to put too fine a point on it, but that is complete nonsense. First off, your insurance company didn't sign the mortgage loan - you did. So acting like it's gonna be the lender's job to get their money from an insurance agency while you're blissfully uninvolved is wishful thinking. But more important is the fact that an emergency of this proportion (wiping out your house) is the absolute LAST point in time that you want to be deeply in debt or worse, going further into debt. Let's examine the scenario you describe: house is gone, but I have a HELOC for say $50,000. So I deposit that Bad Boy in the bank to live on while my insurance pays off. Most homeowners policies are not for "replacement cost", but are for a pre-determined amount. You must stay on top of your insurance company every time your house gets assessed in order for your actual dollar amount of coverage to be somewhere near what your house is actually worth. Assuming you did that, you're still not going to clear enough money from the settlement to pay off the first mortgage and build a new house. Let's say you owe $100,000 on a $200,000 house and you tap your $50,000 HELOC to live on while this all clears. So the insurance company comes through with $200,000. The mortgage company gets $150,000 and you're left with what little is left of the $50,000 HELOC, $50,000 and no house. I think I'm being generous with those figures. Keep in mind that throughout this whole mess, you've been making payments on a destroyed house. Just to add salt to the wound, you're also making payments on the HELOC. Using HELOC money to pay back a HELOC doesn't sound like a "win" in any universe I've ever lived in.

Meanwhile, Paid-Off Mortgage Guy is sitting in a hotel that he's paying for with what used to be his old house payment. When he paid his house off, he re-directed his old house payment into investments. When Katrina hit, he re-directed it again to abnormal current expenses. So the smoke clears and he's standing there with $200,000 to build a new house.

In a perfect world that sounds great. The reality is that the guy with the paid off house didn't have flood insurance and is living week to week with little savings and credit card debt. (Average american) He had 200k equity in his house which is now worth nothing. So would he be better off with nothing or 200k in his pocket and let the bank foreclose on what used to be his house that was fully financed? This is playing out right now in the real world. Even if the insurance came through with the 200k, he's still better off by having access to the money than waiting for all the smoke to clear which could take month's or even years.

This was an extreme example. And yes, I'd rather take extreme measures to deal with extreme times.

Insurance is a fixed amount based on what it costs to rebuild the house as-is. So you are both right :)

When I bought my house, they determined the house would cost $80k to rebuild and were going to set the rate at that, but the type of loan I got required the house be covered at the starting loan amount ($87k). My personal property is insured for half of the house level, so I have ~$44k in personal property insurance.

In a perfect world that sounds great. The reality is that the guy with the paid off house didn't have flood insurance and is living week to week with little savings and credit card debt. (Average american) He had 200k equity in his house which is now worth nothing. So would he be better off with nothing or 200k in his pocket and let the bank foreclose on what used to be his house that was fully financed? This is playing out right now in the real world. Even if the insurance came through with the 200k, he's still better off by having access to the money than waiting for all the smoke to clear which could take month's or even years.

This was an extreme example. And yes, I'd rather take extreme measures to deal with extreme times.

That's wrong again. Neither guy gets paid if he doesn't have flood insurance. The guy with debt makes the payments on a destroyed house or gets foreclosed on - twice. Once by the first mortgage lender, and again by the HELOC lender. If he gets foreclosed on, he won't qualify for a mortgage for at least 3 years. If he makes the payments to avoid foreclosure, he will then have to get another mortgage to buy another house. So two mortgage payments and a HELOC payment. You seem to think the first guy's mortgage is going to go away somehow and that he's going to end up with "200k in his pocket". Where'd that money come from? You think you're going to take 200k from the insurance company, let the lenders foreclose, then saunter away with the money? The lender will just say, "oh, well" and that'll be it?

At worst, the guy with no mortgage loses his house and starts over with one mortgage.

That's wrong again. Neither guy gets paid if he doesn't have flood insurance. The guy with debt makes the payments on a destroyed house or gets foreclosed on - twice. Once by the first mortgage lender, and again by the HELOC lender. If he gets foreclosed on, he won't qualify for a mortgage for at least 3 years. If he makes the payments to avoid foreclosure, he will then have to get another mortgage to buy another house. So two mortgage payments and a HELOC payment. You seem to think the first guy's mortgage is going to go away somehow and that he's going to end up with "200k in his pocket". Where'd that money come from? You think you're going to take 200k from the insurance company, let the lenders foreclose, then saunter away with the money? The lender will just say, "oh, well" and that'll be it?

At worst, the guy with no mortgage loses his house and starts over with one mortgage.

I said 200k equity...no mortgage.
Short version...in an all is lost type situation with no insurance you're better off fully leveraged/financed than you would be with a paid off house.

I said 200k equity...no mortgage.
Short version...in an all is lost type situation with no insurance you're better off fully leveraged/financed than you would be with a paid off house.

My short version: there's no possible way that's true.

My short version: there's no possible way that's true.

Think about it....from a liability standpoint too. If your house is free and clear and you get sued vs. your house fully financed/owned by the bank. Which situation would you rather have from a liability standpoint.

Keep swingin', slugger. Still no contest. U-M-B-R-E-L-L-A P-O-L-I-C-Y. Keep on rationalizing that debt with straw-man arguments - the banks will love you for it.

We just bought a short sale at 25k or more under the value of the home. Everyone I have talked to has told me that in Texas you can not get a loan on the instant equity we walked in with for a certain period. I think a year? I guess it is to keep people from getting into trouble their first year.

Does that sound right? We are not interested in doing this anyway but it would be good to have if we needed it.

Keep swingin', slugger. Still no contest. U-M-B-R-E-L-L-A P-O-L-I-C-Y. Keep on rationalizing that debt with straw-man arguments - the banks will love you for it.

not rationalizing debt....talking about leverage and using equity for financial gain....big difference

We just bought a short sale at 25k or more under the value of the home. Everyone I have talked to has told me that in Texas you can not get a loan on the instant equity we walked in with for a certain period. I think a year? I guess it is to keep people from getting into trouble their first year.

Does that sound right? We are not interested in doing this anyway but it would be good to have if we needed it.

When I was applying for my mortgage, my broker told me that if I wanted the equity out of my home I would have to wait one year. That could very well be the policy held at my bank, but not necessarily the market wide policy.

not rationalizing debt....talking about leverage and using equity for financial gain....big difference

You said a HELOC was a good way to get money to live on in an emergency. You then said that the guy with the mortgage was somehow going to end up with $200k in his pocket. Then you said that if you didn't have insurance it was better to be "fully leveraged" - still haven't figured out why you'd think that unless you consider foreclosure to be a painless thing. Then you said being in debt was good from a liability standpoint.

I'm missing the part where we're "using leverage for financial gain". I think my "rationalization" characterization is more accurate. But I guess maybe my total lack of debt and consequent ability to save tons of money has blinded me.

One day you'll see the light in fully leveraging your property for further financial gain. Debt can be good when its leveraged right.

Cash is king.

ASSUMPTION:
Some unforeseen distress has caused 4 months of missed payments already...

QUESTION:
Which is more likely to be foreclosed upon first?

A) $100,000 value home with a $50,000 mortgage, and a broke owner...
B) $100,000 value home with a $90,000 mortgage, and an owner with $40,000 liquid seperated funds?


NEXT QUESTION:
Same scenario, shift assumption that 'distress' is that a hurricane wiped the home off it's foundation...

Q: Which homeowner is in a riskier, more distressful situation?
Q: Which owner can afford to buffer the transition in humane living arrangements? Which is forced to live in a teeming rapist-infested sewer formerly known as the local sports arena?
Q: Which homeowner has a more powerful 'walk-away' negotiating position with the insurers?

NEXT QUESTION:
Similar scenario... but instead of distress, owners have a business that is sued for damages beyond the insurance coverage on their business...

Q: Which owners will be more attractive in the discovery process to the litigating attorneys?


Liquidity lets you fight another day
Liquidity gets you out of a jam
Liquidity helps you weather a storm

Question 1: Either mortgage gets foreclosed on if you don't make the payments. Your underlying assumption is that "B" gets to keep his $40,000 which he won't after the lender sues him.

Question 2: "A" has $50,000 in debt. Assuming he has no insurance, he's going to make payments on $50,000. "B" has $90,000 dollars in debt, and $40,000 cash for them to take after they sue him for the balance.

In both scenarios, you assume the lender is not going to get his money. You either pay, file bankruptcy, or get foreclosed on and sued for the difference between what the house sells for (zero in this case) and the loan balance. Your laissez faire attitude toward the obligation of the homeowner to pay the balance of the mortgage doesn't change the legal and moral obligation to do so.

"Liquidity lets you fight another day. Liquidity gets you out of a jam. Liquidity helps you weather a storm". Spoken like a dedicated "debt is smart" connoisseur. By "liquidity" you mean "borrowed money that you have to pay back". Cash in the form of 3-6 months' worth of living expenses in a dedicated emergency fund is what bails you out of the above situations. Going further and further in debt during a bad situation is a terrible, terrible idea. I don't advocate paying down your mortgage and having no emergency fund. That's what turns you into Example A. But we are currently standing in the middle of the wreckage of people thinking borrowing against a house for whatever reason (putting that equity to work!!) was smart, only to find out home values can actually go down, preventing a re-fi or a sale. Couple that with one of the other financial screw-ups in the form of taking out a balloon note, interest-only mortgage, ARM or any of the other ways to put at risk the roof over your children's head and you're rapidly in a big mess.

Oh, and for the last scenario with the liability lawsuit, I can easily spin the scenario around and say "what if you're fully leveraged and your business gets sued beyond your liability policy and you are disapproved for a loan for the difference?". The underlying, unspoken implication in your ideas is that if you have too much trouble, you just walk away and the less of your money you have in the home or business the better.

I guess we'll just agree to disagree, but I'll finish up by saying this: I've been where you claim it's smart to be. I doubt you've ever been where I am - owing no man one thin dime. I won't even make a mark on the IOU board at my crash pad for a Coke on credit if I can't make change in the collection cup. Heck, I won't even take the Coke out first then walk over to my pants and get the change. Yes, I'm weird. Suffice to say having complete control over one's income because you saw the fallacy in sending all out to lending institutions every month allows very rapid building of wealth and peace of mind that cannot be equalled.

I hope that my explanations can open the collective eyes to a larger picture.

While interest on debt is an expense, blindly eliminating all expenses as fast as possible is not the optimum solution to financial success either. Rather, making sure that whatever your expense is buying you in utility (how you are using your leverage cash, in this case) is getting you the maximum results... THAT is the key.

I'm with you on all your points, but there's another side that can be taken advantage of under the right circumstances. I changed my ways and got comfortable in life (million + net worth), but comfortable isn't wealthy. I want to be wealthy.
I'm debt free, other than a small mortgage right now, with a yrs gross pay in the emergency fund, 2 fully funded 401k's, 2 brokerage accounts, etc., but when the time is right I'm making a move and plan on tapping my equity for a short period of time. (6-8 months)

Different strokes for different folks.

Peace

Well, I've been doing some studying on the subject, and also reading your posts, and the route I'm going to take is to do the renovations as I go along. There's some pretty drastic situations being brought up in here (Katrina), and the house is not in THAT bad of conditions, just a lot of cosmetic work to be done. Most of which I can do myself. The reason I asked the original question about home equity was to make sure all of the work gets done in a timely manner. I don't have enough money liquid enough to do everything at once, and I don't want to access my investments right now for a number of reasons, the main one is because I put a set amount away to never touch, and I'm going to stick to it. My feelings is that if I have to pay a little bit of interest now to have peace of mind, then I will do so. I guess I look at a lot of older folks and see them struggle, and I'm putting away to ensure that I'll have enough to live off of for years. I'm not counting social security to take care of me after my working years are over. I'm sure most of the elderly that are struggling now didn't plan to have to do so either. At any rate, thanks for all of the replies! Keep them coming.

Save the money, perform the upgrades as the funds allow over time. I hate this borrow now to have NOW. Why the need to have NOW if the upgrades are not a necessity? If they are a necessity (your foundation needs repair), than you made a poor buy :)
I agree 100%.

You already have the house, which is the item so large that it's about a necessity to borrow for. Borrowing for renovating just means that you pay more for them.

Before making such a foolish step, do the math and figure out how much (over time, compounding interest) you will pay for the upgrades. You will likely squander away all the increased equity of such upgrades, just by financing them.

In other words, if the upgrades cost you only $5000, and increase the value of the house by $10,000, you may wind up paying $13,000 to pay it off....which means your investment lost money.

There's a reason that HELOC's are advertised so much, and it's not because they're good for you, it's because they're good for the banks. Pay for upgrades as you go.