We're going in circles and can use some advice. We bought our first house 3.5 years ago for $332K with an FHA loan. Our interest rate is 3.75% and we currently owe $300K. We pay PMI at $300/month. Prices have skyrocketed since we purchased (when weed became legal - lol), and we reasonably guesstimate that our house is worth $410-430K. We have approx. $12K in credit cards, and estimate we need $15K to do some home maintanence (radon mitigation, new insulation, minor remodel, concrete work, etc).
We want to tap into our equity for these expenses, but are paralyzed trying to pick the right option. Should we do a cash-out refi, home equity line of credit, or a home equity loan? Or should we look into a personal loan, or new credit cards with 0% intro rates and balance transfers? We've done some research, but it seems like every article contradicts the last one. Just looking for practice advice.
BTW - DH asked me to post this (since you gave us such good advice last year on our car situation). I just read it to him and he said "it's both too broad and has too many personal details!" Lol. Any advice you have is greatly appreciated.
Post by whitemerlot on Feb 7, 2016 21:04:43 GMT -5
I would check into refinancing to get rid of the PMI, but I would not want to take cash out of your home equity and have to pay it back for 30 years. The only think on that list I would be willing to do that for it the radon mitigation, because it's a health and safety issue. I would try to refinance and then use the $300 a month you are paying in PMI to pay down credit cards first, then save for home improvement.
Post by imojoebunny on Feb 7, 2016 21:17:46 GMT -5
I would see what the rules are to remove PMI for your loan. I have had PMI removed a year after purchasing, since I did significant remodeling, but the rules are different for every loan. That would free up $300 a month toward you credit cards. I would not do anything else that did not absolutely have to be done for health reasons, until that is paid off. I would not take equity out of my house to pay off consumer debt for multiple reasons.
New insulation is not a major expense, if you contract it yourself. I want to say that I had new insulation put in that was significantly over code (so likely in line with your area) for $500 for blown in. I did not have the old taken out, which adds to the cost, but not necessarily the effectiveness, obviously it depends on the size and layout of your house.
Radon mitigation would worry me, and might be worth doing before the credit cards, but it is not common here, so I have no idea of the cost.
I would see what the rules are to remove PMI for your loan. I have had PMI removed a year after purchasing, since I did significant remodeling, but the rules are different for every loan. That would free up $300 a month toward you credit cards. I would not do anything else that did not absolutely have to be done for health reasons, until that is paid off. I would not take equity out of my house to pay off consumer debt for multiple reasons.
New insulation is not a major expense, if you contract it yourself. I want to say that I had new insulation put in that was significantly over code (so likely in line with your area) for $500 for blown in. I did not have the old taken out, which adds to the cost, but not necessarily the effectiveness, obviously it depends on the size and layout of your house.
Radon mitigation would worry me, and might be worth doing before the credit cards, but it is not common here, so I have no idea of the cost.
Apparently the PMI rules were changed several times, and our loan falls into a five year minimum period (June 2012). We spoke with our loan consultant, and she said there is no way to drop PMI without a refi.
So I get why unsecured debt is better than secured, but at the same time, isn't it better to pay 4% through a secured loan than 15%?
Also, as far as we're concerned, all of these projects are high priority. Our house is absolutely unbearably hot during the summer without adequate insulation. Not only are we miserable, but we waste money trying in vain to cool the house. The concrete around our house is sloped incorrectly, and caused some minor flooding last spring. If we have another wet season, we could be looking at more expensive repairs. Or, if it's dry, it's an expense we can put off. Hard to say...
Do not use home equity for credit card debt. Never tap into secured debt for unsecured debt.
But why? It's a lower interest rate. And DH works for the Feds, so while job security is never 100% guaranteed, it's as close as you can get in this day and age. Do you think we should look at shifting balances around on new cards?
If you have $12k in credit card debt and cannot afford home maintenance it sounds like you may be living above your means. I would think taking out a home equity loan with another monthly payment would only further the issue. And if your credit card debt is from overspending, once those balances are down to zero would you charge them up again. I don't really think there's enough info here, but I would advise against further mortgaging your house unless it was an emergency.
Do not use home equity for credit card debt. Never tap into secured debt for unsecured debt.
But why? It's a lower interest rate. And DH works for the Feds, so while job security is never 100% guaranteed, it's as close as you can get in this day and age. Do you think we should look at shifting balances around on new cards?
Because if something happens and you can't pay your credit cards, you won't lose anything except a good credit score. If you can't pay your mortgage, you'll lose your house. Also, I'd work on living within your means and saving. You don't want to take a loan to pay off your cards and then just run up debt again.
We're not living above our means. We're contributing to retirement, college, our efund, our credit card balances are decreasing, etc. But we also don't have $15K just sitting around, and we need to address these issues sooner rather than later. Does it make sense to charge up the CCs and underfund our various savings when we have $100K-ish in equity at we can borrow against at low rates? I honestly don't know. That's why I'm here.
Well, MM is pretty strict on not turning unsecure loans into secured, but ultimately only you know the actual risk of you running up those CCs again after you pay them off with your home equity.
A financial reason not to pay off CCs with home equity is that you're paying that 4% for 30 years, whereas presumably you'll have your CC paid off in a year or so.
I think it's reasonable to use home equity to pay for the radon and the concrete/drainage issues. I assume those aren't the full $15k, so you can certainly split the difference: pay for those now, and pay for the minor remodel with savings built up from saving $300/month after eliminating PMI.
I can't really help with the HEL vs HELOC vs whatever else; all I really know is HELs are usually fixed amounts/terms whereas HELOCs work more like a credit card (you can spend as you need it ane increase your balance). We had a HEL when we first bought to avoid PMI and paid it just like our mortgage.
We may be missing a lot of info here so feel free to disregard or ask for clarification.
I forgot about the insulation. Is that just in the attic? If so it really shouldn't be that expensive (not a large part of your $15k).
I'd consider: -Refi to eliminate PMI if your rate and closing costs are such that they don't add more than $9k ($300*2.5 years) -Consider HEL/HELOC for the radon and concrete -Save $300/month from PMI from now through May and use that to pay for insulation -continue paying off CCs and saving for remodel with $300 after May
How did you get the 12k in credit card debt? Was it some type of emergency or daily living ??
Well both, kinda. We haven't had any big emergencies, nor are we relying on them to make our expenses. There was that time DH traveled to wilderness before payday and I put our household expenses on the credit card, and that time we all had to travel to a funeral, and that time we had to take the kiddo to the ER,...stuff like that. We can do better with the CCs, but we're not completely irresponsible.
1.) Turning credit card debt into mortgage debt is a negatory. The interest rate me be lower, but you're also spreading it out over 30 years and reducing the equity in your home. And, if the housing crisis taught us anything, it's that your equity can vanish pretty damn fast. What your house is worth now may not be what it's worth five years from now, when who knows, the shit hits the fan and you may need to sell. The shit hits the fan more often than people like to think.
2.) You say you're living within your means but you also have $12k in credit card debt for things that should be covered by an efund. You also don't have cash for basic maintenance (insulation is absolutely a basic expense.) Yet, you also want to do some remodeling despite all this. That is not the actions of people who live within their means.
Transfer the credit card debt to a 0% card and get yourself on a realistic budget. Use your equity for absolutely necessary expenses only, things that are essential to the safety of your family. Because, God forbid, with your current financial situation you'd be absolutely fucked if you had a major issue. Save that equity for when you need to jackhammer concrete and dig up water lines or something equally catastrophic.
I would take a balanced approach. I would see about refinancing and getting some cash out for the needed repairs but not the CC. Presumably even if you were to take out $15k for repairs you still wouldn't have PMI based on new guestimated value. Then take the extra $300/mo from not having the PMI and add it to your CC payments.
You mentioned you are contributing to an efund. How much is in there? With $12k in credit card debt at 15%, I'd consider using at least some of the efund. Some of the expenses you listed that went on the CC are efund expenses anyhow, IMO.
We're not living above our means. We're contributing to retirement, college, our efund, our credit card balances are decreasing, etc. But we also don't have $15K just sitting around, and we need to address these issues sooner rather than later. Does it make sense to charge up the CCs and underfund our various savings when we have $100K-ish in equity at we can borrow against at low rates? I honestly don't know. That's why I'm here.
What do you have in your efund? What is your monthly budget line for home repairs (in other words how many months will it be until you can just pay for some of this stuff ?). How long til you just pay off the credit cards without tapping into home equity?
STOP using the credit cards. Find a way to cut current expenses. - bring in more income if necessary. A radon mitigation is not very expenses in most cases - I would prioritize that - use your e-fund to pay for that if necessary. STOP contributing to college funds while you take care of your credit cards and home maintenance.
Do NOT think of your home equity as a CASH COW. Basically - NO and NO - don't do it. (You come across as looking for the easy way out without changing your approach to your finances.)
You ARE living beyond your means if you cannot absorb these expenses without going 12K in credit card debt.
Will you get a 2015 tax refund? If so - use that toward your expenses. Likewise with any gift money and bonuses that come your way.
How did you get the 12k in credit card debt? Was it some type of emergency or daily living ??
Well both, kinda. We haven't had any big emergencies, nor are we relying on them to make our expenses. There was that time DH traveled to wilderness before payday and I put our household expenses on the credit card, and that time we all had to travel to a funeral, and that time we had to take the kiddo to the ER,...stuff like that. We can do better with the CCs, but we're not completely irresponsible.
But just the fact that this happened means you are living above your means.
I would refinance to get rid of PMI and use part for the emergency house renovations, but not for the credit cards. I would drastically cut down on the budget to pay those and build an emergency fund instead.
ETA: or use the e-fund to pay the credit cards, and then build it back.
Post by steamboat185 on Feb 8, 2016 9:58:43 GMT -5
I wouldn't. I think we live in the same Metro area and I know I was amazed over the summer that home sales in my neighborhood increased by 80k in 2-3 months. It has slowed however and my Zestimate (I know) actually just dropped. I would be really nervous that you could end up under water pretty quickly. Radon is cheap- I think ours was under 1k. Insulation is also cheap especially if you do it yourself. Pick a nice spring day and man the blower while your DH does the spraying- it only takes a day. Instead of doing the concrete work right now can you move the gutter spouts further from the foundation? We did that when we first moved in and last year with the crazy rains and it makes a huge difference and only costs 20 bucks and some time. I'd work on paying down the CC debt and try to free up some cash so it doesn't happen again. Good luck!
The biggest reason I wouldn't add the ccs back to a new loan is whatever habits got you to the point where you have $12k in CC debit haven't changed. This article says 70% of people who consolidate cc debts end up with that amount of debt or more a few years later.
The FHA PMI thing stinks. As soon as you have enough equity it should be gone. But you have to deal with what you have. Refi to get out of that. Take a *very* close look at what you are spending and how you got the 12k in cc debt. Something is not working with your budget if you have cc debt. Get free credit counseling before you use the equity in your home to pay off the 12K. If you figure out where you can plug the hole in your budget and can feasibly do it going forward only then would I think the cash- out would be an option.
I'll echo the above - you've gotten very sound advice, even if it's not what you were hoping to hear. If it's any consolation, we refinanced our loan to drop PMI. It wasn't cheap, but dropping the PMI was AWESOME.
You are absolutely living beyond your means if your efund was not sufficient to float the travel to the funeral, kid's er visit, etc. Anyone with $12K in credit card debt has some serious issues and needs to take a deep look at how they plan to repay that before they do anything else. Stop, do not pass go, and readjust your budget to make that happen.
Now, one of the ways that you might do that is with a refi that gets rid of PMI. Your PMI amount is very high and this is why I almost NEVER recommend FHA loans anymore. Their PMI rates are insane. You can do a traditional loan at this point with only 5% down, but the good news is that it sounds like you might have 20% equity in order to do a traditional refi with a loan for the value of 80% or less of your property.
Do not do a home equity line and take $12K out of your house to pay off your credit cards, as others have said. If you are facing high interest rates on the cards and have a good credit score, you should be eligible for some sort of 0% offer if you transfer a balance from one card to another or open up a new card. Even with a 3-5% transfer fee, if you can commit to paying down the $12K in 18 months or something, it could be worth it.
IMO, one of the biggest problems with tapping into your home's equity is you're paying off these loans with money "out of thin air." There's no real motivation or reason for you to change your spending habits. Compare that to taking a look at your budget and figuring out ways to cut back in certain areas so you can pay these off faster. It will take longer, but you will actually feel that you have more money once your credit cards are paid off, and you will probably change your spending habits in the process.
I'm not opposed to tapping into equity when it makes sense (we've done it for a renovation and also to purchase 2 side businesses). However, I wouldn't do it to pay off cc debt.
Our heloc gives us credit up to 80% of the value of our house and it's at prime rate currently 3.5% I think. So it can go up or down based on the Fed and what interest rates do. For us, it made sense to open one- it's open for 20 years and as long as we took out $10k at closing, there were no fees (we paid back the $10k a few days later).
A HEL is like a mini loan- fixed terms, interest rate, payments and length.
I would contact a mortgage company to see what your payment would be to refi into a conventional loan. The costs may be a few thousand but could lower your payment (by dropping PMI) to make it worth while. We had a company come blow wall insulation for us and it was around $3,000 (drilling into brick and then redoing the mortar) Our attic, we did ourselves for a few hundred. That one is easy. Are you sure the insulation will help cool your house? We had a hot summer a few years and also struggled. Apparently our HVAC had a leak in the middle- our AC guy refilled the freon but by the next summer- same problem. Hello $5k new AC unit!
I know the rest you think you need done, but really it can wait. I would focus on trying to get out of PMI if it makes sense and then funneling $$ to knock down some CC bills.
FWIW, MrsAxilla, H is a civil engineer and I asked him about concrete/drainage this morning and he said he'd absolutely prioritize that to avoid $100k in future foundation issues.
It's nearly a wash to refi or wait out the 5 year PMI obligation at this point ($300*17 mo). I would probably go get a HELOC and be very aggressive paying it off ASAP. It is a line of credit against the equity on your house, but I think the appreciation in home values has increased (100k) enough that you have a safe amount of equity even with a potential market correction. It's on you to be responsible with the money, but in this situation I feel like you need to do something about your maintenance issues.
FWIW, MrsAxilla , H is a civil engineer and I asked him about concrete/drainage this morning and he said he'd absolutely prioritize that to avoid $100k in future foundation issues.
Yes, this a big concern. We re-engineered the yard to fix some of the drainage issues, but we obviously can't do the concrete ourselves, and there is a lot of it. Last spring was crazy wet, and if we have a repeat, we could be in real trouble.