For Love and Money
For some time we've intended on remodelling our house but with the housing slow down we decided now might be a good time as there is no shortage of builders. So we called in a few builders to come in and give as a quote of the remodelling. So the last few weeks I've been entertaining builders in the evenings after work as we go through the intended remodelling works.
We've gotten in all the remodelling quotes and settled for one of the contractors. The quotes ranged from as low as $16,000 to as high as $28,000. The company that offered us the highest quote also seems to also have told us the most bullshit. For one, even though they bill themselves as a high end luxury contractor, they seemed to be the most inflexible and their agent told us a pack of lies. Every time he opened his mouth I could literally smell cow dung from his breadth. We settled for the last builder even before he had completed his sales pitch. Not only was he forthright but he gave us a reasonably priced estimate of between $19,000 to $21,000 depending on the options we choose.
Now that we have shopped for the builder and settled on the design and price, the next step is seeking finance to fund the remodelling. As much as I would like to pay for the costs upfront, I am not able to foot this big undertaking as we had not specifically saved for it and we don't want to take a dip into our savings.
Regarding the financing, we have a few options, namely. Either a revolving type credit where you get a no interest/no payment deal till 2009 or go for the home equity financing. Undecided, we decided to apply for both. As expected we were approved for both loans within a few days. However, the bank is trying to force us to take a larger home equity loan than the $21,000 for the remodelling costs. Our plan was to pay the builder 20% of the cost and finance the balance of the amount. The bank instead wants to push us into cashing out a minimum of $25,000 in order to get the best interest rate of prime rate minus 1%. The other option they are offering is a Home Equity Loan for the exact amount that we want and for a fixed term but with a 1% prepayment penalty and at prime rate, which currently stands at 7.5%.
Therefore we have 3 financing options. Either we take a HELOC for up to 80% LTV ratio of our dwelling, or take the HEL for the exact amount that we want, or settle for the 12 months no interest/no payments revolving credit.
So what have we decided to do? We'll go with the revolving credit and at the same time open the Home Equity Line of Credit though we will not cash out any money out of it. Instead, we'll use this money to pay-off the 24% interest revolving credit at the end of 2008. That way, we'll have borrowed up to $17,000 interest free for one year and then switch to the interest deductible HELOC loan for the remaining of the unpaid balance.
Based on the state of the US economy and the health of the financial sector, it is unlikely that the Fed will raise interest rates in the near term. If anything, the financial markets are priced for further cuts. So we are not worried about rising interest rates and therefore we can wait until we are ready to cash out the exact pay-off amount in order to lock in the interest rate and the term of the loan. And should the rates fall further in 2009, we have the option of unlocking the loan and locking it in at a lower rate for a cost of $50.
My plan for the coming year is to pay down the revolving credit loan as much as possible. I will do this over the course of the year though I could hold onto the money till the end of next year and lump it together into the pay-off amount. If need be, we can forgo going on vacation next year as I don't want to clear off this loan as fast as I can even though I could get by just paying off the interest only on the HELOC. As it is, I never been keen on taking a home equity loan but this is a good time to update our home. As they say, only a fool does not change his mind. Its probably going to take at least 3 years to recoup this investment as the housing market is on a downtown. We've just had the real estate tax appraisal and if we sneak in some updates now it will be at least 2 years before the county comes back calling for an appraisal and even then they might not do a physical inspection as they have just done it.
One the other hand, we also want to take advantage of the low interest rate environment to spruce up our house. Now that banks are not lending to real estate investors and home buyers are shrinking, they are in a way desperate to get borrowers with stellar credit history's. Being of that type, I would never shy from squeezing money out of the banks. The 12 months interest free loan on on $17,000 in the current financial environment is a steal. And the creeping inflation makes this deal even more appealing than if we had saved for prior to undertaking the remodeling project.
PS. I'm done with ranting (here, here and here) about the Fed injecting money into the US economy. It is with great pleasure that I am going to borrow part of this money and make the most out of it.