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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
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Bankrate.com |
High LTV means problems for me
Dear Dr. Don,
Here's my problem. I have pretty much taken out
100 percent of my equity in my townhouse to upgrade the unit and pay
off some bills. I was planning on moving within the next two years
and would like to have the equity as a down payment. I stand to make
about $55,000 off the sale of my home but have a home equity loan
of $49,000.
I have no problem making the payment on the loan,
but was wondering if it would make sense to pay off the equity loan
with an unsecured loan so I could either take the loan with me to
my new home, or roll it into my new mortgage, seeing as I plan on
being in my new home for at least 20 years.
I was told to pay off the equity loan with the money
I make from the sale, but that leaves me with only about $5,000
as a down payment. I could get the home I always wanted if I could
have $20,000 for the down payment. I hope you can help me with this
because at the time I took out the home equity loan, I was under
the impression that I could roll the remainder of the balance into
my new mortgage, but was told that isn't true because it is a secured
loan. Thanks for any help you can give,
Ryan Replace
Dear Ryan,
First, establish your planning horizon. Do you want to move soon,
or are you planning to move in two years? Two years' worth of payments
on your first and second mortgages, along with any price appreciation
on your home, will help you rebuild equity in the property. Of course
the home you're interested in is also likely to appreciate in value.
Portable home equity loans do exist, but they're rare
birds. You don't have one, so it doesn't matter. You'll have to
pay off the home equity loan when you sell your property. Getting
an unsecured loan to pay down the home equity line isn't the answer.
The interest rates are prohibitive, currently 12 percent to 14 percent,
and the additional debt may negatively impact your ability to qualify
for the mortgage(s).
It sounds like you're a candidate for some variant
of the 80-10-10 mortgage. With this type of loan, you take out a
first mortgage for 80 percent of the home's value, a second mortgage
for 10 percent of the home's value and put down a 10 percent down
payment.
The concurrent closing on a first and second mortgage
lets you avoid private mortgage insurance even though you don't
have enough money for a 20 percent down payment. A 75-20-5 mortgage
is one variant of the 80-10-10 mortgage and may come closer to meeting
your needs for this loan.
If you've got your heart set on a home that you expect
to be in for the next 20 years, I'd find a way to buy it now while
interest rates are still low so you don't have to guess at the relative
values of the two properties at some point in the future.
-- Posted: May 13, 2004
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