land investment with home equity
My wife and I are looking at a piece of property to buy for investment
purposes by refinancing our home. We owe $81,000 and have six years
left to pay off the mortgage. Our current interest rate is 5.125
percent. Our house is valued at $300,000 and we would need to borrow
an additional $100,000 to purchase the property we are interested
We are planning on retiring in two years and three months
and will sell our house at that time and pay off the mortgage. We
plan to build on the piece of property within a few years after
that and resell. We already own our retirement home on a lake and
this property is within a few miles of that home. Our current mortgage
lender will refinance at 7.125 percent on a 15-year loan and our
closing costs will be in the neighborhood of $1,800. Are we pursuing
the right financial avenue or do you have other suggestions?
-- Don Domicile
A home equity loan or a home equity line of credit
makes a lot more sense than refinancing your existing mortgage at
7.125 percent from 5.125 percent plus paying $1,800 in closing costs.
A second mortgage (home equity) typically has much lower closing
costs, and you'll only pay the higher interest rate on the $100,000,
instead of $181,000. You'll want to make sure that there's no prepayment
penalty on the second mortgage if it's paid off in two years when
you sell your current home.
I'd lean toward the home equity loan with its fixed
interest rate rather than a variable-rate home equity line of credit,
but the Bankrate feature, "5
questions to help choose loan or line of credit," discusses
the decision variables.
Currently the national
average is 7.9 percent for a home equity line of credit and
7.63 percent for a home equity loan. I'm a little concerned that
your credit history might not allow you to borrow at these levels.
I got that concern from you saying your lender would offer a 15-year
mortgage at 7.125 when Bankrate's national average for a 15-year
fixed-rate mortgage is 6.29 percent. If your credit is in good shape,
your lender's not doing you any favors at 7.125.
Bankrate has partnered with myFICO to offer a free
credit score estimate or you can contact
the credit bureau(s) and purchase your credit score. You can
get a free
copy of your credit report from a credit bureau once each year
but that won't provide you with your credit score.
There are just too many unknowns in the mix for me
to advise you whether it makes sense to buy the property and build
a spec home on it. Bankrate's mortgage glossary defines a spec home
as, "A house built before a buyer has been found, on the assumption
that one will be found."
I don't recommend refinancing your first mortgage
to buy the property if you can get a home equity mortgage that can
do the job with lower closing costs and an interest rate currently
below 8 percent.
We didn't talk about land loans to finance the property
purchase. That's another possibility, but the home equity loan or
line should be a less expensive way to finance the purchase if you
plan to pay off the loan when you sell the house in two years. The
Bankrate feature, "How
to buy a vacant lot," has a good discussion about land
loans and other considerations in buying land.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "Financing
a home," "Saving & investing" or "money."