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      11-22-2020, 09:46 PM   #1
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Dumb HELOC questions

I have about 4 years left to pay on our mortgage, and nothing chaining me to the insane taxes of NY State other than my job of 35 years. With COVID making WFH more acceptable for many employers and a blitz of city folks driving our local (upstate) housing market prices crazy trying to escape the urban areas, it seems like a good time to plan an exit strategy for retirement.

My DW is thinking about a proper car-person barndominum in the Carolinas, all steel shell/frame and with the ultimate open floor plan. Land down there seems to be cheap, and mortgages/taxes for 5+ buildable acres are less than my monthly cable bill.

Rather than go through the hassles of a construction loan, I've been looking at a HELOC against our current house from our local credit union to finance the barndominium construction down there. They are *apparently* offering (which seems too good to be true):

1) An initial 5 or 10 year draw period, with interest-only payments needed.

2) After 5/10 years of draw, you have 15 more years to pay it back at P+I.

3) The interest rate is adjustable quarterly, at 1/4% *below* prime during the draw and repayment periods.

Am I reading this correctly? Can I *really* build our retirement house early, and only have to pay back the interest (@ below prime!) for 10 years?

I am having a hard time believing that we can build/own our retirement house for 10 years with nothing more than a land mortgage and HELOC interest payments, and leave NY State at any time over those 10 years if our employment situations change with no mortgage whatsoever...assuming that the local housing market doesn't tank like it's 2008 all over again.

Is it really this simple, or am I missing something like a hidden balloon somewhere?????
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      11-22-2020, 10:15 PM   #2
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Everything you wrote is Greek to me, but I wish you the best of luck with it. I hope it works out as easy it seems.
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      11-22-2020, 10:29 PM   #3
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On the surface it seems to give you the funding source you describe and apparently wish to have. It sounds like a revolving line of credit, secured by your primary dwelling, with a conversion option to a 15 year term loan.

You are paying the bank a coupon of 3%, using a prime rate of 3.25%. They are buying a bond from you, backed by your real estate. A 3% bond is in the ballpark today. Moody's investment grade bond average is around 2.3%. High yield bonds are north of 4%. So the bank views you and your real estate as riskier than an investment grade corporation, but less risky than a high yield issuer.

Alternatively, are you in a position to fund construction of the barndominium out of liquid assets (cash or liquid securities)?

Last edited by chassis; 11-22-2020 at 10:36 PM..
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      11-23-2020, 12:11 AM   #4
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rates are cheap. do a cash-out refi on your primary and lock in that rate. if your situation changes, your payment is the same. unless you're incredibly disciplined- people always get fucked screwing around like this with helocs.
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      11-23-2020, 06:59 AM   #5
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Just to state the obvious to be sure it’s obvious.... if you sell your current residence securing the HELOC, you will need to repay the HELOC in full at closing since that is the collateral for the HELOC. You could secure new financing on the new fully constructed home at that time, but obviously at terms unknown today.
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      11-23-2020, 08:10 AM   #6
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If you're considering new construction, then construction loan isn't such a bad thing; while the choices are limited and very area-specific, the financing bank will pretty much serve in your interest. When all is done, convert into a regular mortgage, preferably 15 yrs or shorter. Obviously the rates may rise by then, but they'll rise for your HELOC as well.
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      11-23-2020, 08:46 AM   #7
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It really is simple as the OP outlined, but as others have noted there may be better (cheaper, safer) alternatives.

One is to do a cash out refi on your existing house. I’m guessing 2.5% 30 year term. Low monthly payments and you can pay it off when convenient or when your house sells.

Another is to do the construction loan route, which allows you to have “permanent” financing on the new place. Again you can pay it off whenever convenient for you, but the monthly payments from a permanent fixed rate loan are not going to rise and threaten your retirement income.

You might ask a tax advisor if there is an advantage in arranging your new financing on the new house or the old. Tax deduction in your current state of residence vs new state, and establishing residency would be the two issues of concern to me (and I really don’t know the answer).
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      11-23-2020, 09:02 AM   #8
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Quote:
Originally Posted by M_Six View Post
Everything you wrote is Greek to me, but I wish you the best of luck with it. I hope it works out as easy it seems.
My understanding of the options are:

Construction loan against the new house, where everything needs to be scheduled in the construction process and the bank pays contractors based on construction milestones defined at the start of the project. I believe that you have to pay the principal and interest (P+I) from day one, based on the amount paid out by the bank. I suspect that this would be the hardest option to get for building something unconventional like a barndominium, but works fine for someone stick-building a traditional cookie-cutter house in an HOA or subdivision.

A fixed equity loan against our old house, where we can borrow up to 90% of our equity at a rate higher than a mortgage as one lump sum. Payback starts immediately, and is also P+I from day one.

A home equity line of credit (HELOC) gives you a checkbook to write as many small loans as you want over the 5 or 10 year draw period, not to exceed 80% of the old house's value. You only have to pay the interest on the money that you take out over the course of the draw period. After the draw period, the final balance turns into a 15-year loan with variable APR. This seems to be perfect for building a barndominium over a few years at a leisurely pace, paying only interest.

With about 9 years left until retirement, the first two options would leave us paying for mortgages on two houses the whole time. (Well, at least for 4 years until the old house is paid off.) The HELOC appears to offer a path for financing the new house construction, and only paying interest on that money until we sell the old house and use the proceeds to pay off the HELOC (and possibly any remaining mortgage if we want to move sooner). Owning the second house would only cost us a land mortgage payment plus the HELOC interest payments until we are ready to make the jump.

chassis - I would be depending on my liquid assets for the land mortgage downpayment, and as a last resort funding option to cover construction cost overruns.....
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      11-23-2020, 09:36 AM   #9
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I was just quoted 2.5% for a 15 yr loan for construction/conversion and not tied to our house. Of course they know we have suitable equity in it to cover so risk is low.

(we are doing 20% coverage which may help)

Good luck.
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      11-23-2020, 10:55 AM   #10
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Quote:
Originally Posted by vreihen16 View Post
My understanding of the options are:

Construction loan against the new house, where everything needs to be scheduled in the construction process and the bank pays contractors based on construction milestones defined at the start of the project. I believe that you have to pay the principal and interest (P+I) from day one, based on the amount paid out by the bank. I suspect that this would be the hardest option to get for building something unconventional like a barndominium, but works fine for someone stick-building a traditional cookie-cutter house in an HOA or subdivision.
..
Construction loans are interest-only (usually, I believe) till the construction is complete; then you convert to whatever loan you choose.

If you act as a GC, or have a very loose schedule/unclear plans/not sure of the final product, then yeah, bank won't like it and probably won't underwrite.
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      11-23-2020, 11:43 AM   #11
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We are on the other coast, but when I did a construction loan, they wouldn't pay out a dime until we had approved plans with the county.
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