HELOC question

[supton]

I know I should go to bogleheads but I know you guys better.

At the beginning of the summer we took a look at a property that we'd like to get. My only debt is mortgage, have decent savings but not enough to buy a house. Wife wants to figure out how to pull this off, and I suspect the right answer "shouldn't be done" but what the heck--is it doable?

Just got the pre-estimate on repairs to my house. $10k might fix the wall. $20k "just in case" for a conservative estimate. He won't know until demo, and to do demo I need to move out--granted, he thinks it's only 2 or 3 weeks to do the job. That said, I also have ice damming, and one possible fix involves ripping off the roof to redo the underlayment--it wasn't done right 10 years ago, and it's possible that my wall issue might be fixable with lots of plywood to make the roof resist wall movement. After pulling the house square. So add another $10k for the roof. That kind of repair is beyond my emergency savings as you can guess. [Funny how I'm contemplating spending $30k on a house that is valued at... $30k.]

We absolutely do not want to stay in this house. Bulldozing and building has been contemplated to fix space issues, but we're talking all new foundation and up. We'd rather do an as-is sale but I don't think it would sell.

So: I'm thinking, 401k loan to secure new house. Once moved, secure a HELOC on my first house. Commence repairs. Sell house and pay off 401k & HELOC. Question: my current house has of course been my primary residence, if only because it's my only residence. Buying a second house to be my primary residence... what does that do to my first mortgage, and does it impact my ability to secure a HELOC on it?

 

[hatt]

I'd try to sell it now.

 

[supton]

Originally Posted By: hatt
I'd try to sell it now.


Not ruling it out. The contractor said he was booked through November; so I don't think I could start repairs that soon. Real estate is funny in that there are records online--otherwise I'd be tempted to try an as-is sale until I could get someone to work on it, then pull from market (?) and do the repairs, then put back up--but at a higher price, of course.

But if it were to magically sell tomorrow (at a reasonable price) I'd be all over that! Heck, I think I'd be open to selling with the contingency of doing the repair--but selling at full price, of course. Once out of the house perhaps work could start sooner.

We did get a CMA a couple months ago (took this long to get the repair estimate) so I need to talk to my realtor about what she thinks is best. I'm just trying to shore up possibilities, and from neutral parties.

 

[NormanBuntz]

My two cents is that borrowing on your 401K is a mistake. Unless you redeposit the funds within 60 days, you must pay income tax and a 10% penalty unless you are already 59 and a half, then only the tax. What type of home is your primary home? Cabin, old farmhouse, etc?

At least with the 2018 tax law, if you borrow on your HELOC for primary home expenses, it's still tax deductible. Tough decision, but remember what Confucius say: Happy wife, happy life.

 

[SwampSurvivor]

What's wrong with the wall?

 

[supton]

Originally Posted By: NormanBuntz
My two cents is that borrowing on your 401K is a mistake. Unless you redeposit the funds within 60 days, you must pay income tax and a 10% penalty unless you are already 59 and a half, then only the tax.


That does not appear to be true. Everything I've read says that a 401k loan is basically transferring money from one pocket to another, especially in terms of a house purchase. As long as you repay yourself, no taxes involved. The biggest risks are: not being able to pay back, and time lost in the market. If it's a short term loan loan though, market losses are minimal, while one avoids higher interest rates and fees that apply to personal loans.

Quote:
What type of home is your primary home? Cabin, old farmhouse, etc?


Old camp that was converted into a full year round house (built in the 40's, renovated late 90's). At 700 square feet we outgrew it years ago. We bought it as a starter home 13 years ago, and then weathered the financial crunch. Technically we are way ahead on the equity front--had the wall not moved. Also all the value is in the land, which is good/bad.

Quote:
At least with the 2018 tax law, if you borrow on your HELOC for primary home expenses, it's still tax deductible. Tough decision, but remember what Confucius say: Happy wife, happy life.


Indeed. But it'd be a happy family. Kids get their own rooms, I get a real master bedroom, 15 minutes closer to work, etc. Current house is 700sqft with about 560 in the basement; this ranch is nearly 1,700 feet upstairs--and the same downstairs!

 

[supton]

Originally Posted By: Miller88
What's wrong with the wall?


Top is kicking out in the center. Long story... But you know how rafter ties are used to keep the header plate from being pushed out by the load of the roof? I don't have those. It's a 1.5 story house and no way to put them in. Collar ties might help but I'm dubious. Personally I think it's from windows that someone put in; they cut a bunch of studs and the second story floor joist was being used (with the full length studs) to resist movement.

OTOH the contractor looked at the knee wall upstairs and said that the knee was structural. Like maybe they knew this would happen. Well, it worked for decades but the last ten years appears to accelerating in movement.

That and it's just too dang small. Two bedroom so my son and daughter share, 700 square feet, etc. By today's standards it's poorly built so slapping on an addition seems wrong--the rest of the house would be questionable.

 

[ARCOgraphite]

401K loan is an ABSOLUTE NO - unless you're past the penalty period and enevn the its a NO. Are you over 58? Will you getr a pension? Now You could argue you are not going to earn much in the market in the next couple of years and you would be saving the money from loss but I would not touch it unless you are disciplined enough to repay in a timely manner.


I had a HELOC with Banco Santander (Not an American bank AFAIK) interest only and keep the PAY OFF money in the market during the run up and added a 1/4 mil to my retirement. The HELOC was made at 2.75% and it didn't go up over a decade. Got it at a LUCKY TIMER.

BEWARE! LIBOR and PRIME will be running up as we inter an inflationary period - I'd would shy from a variable rate HELOC.

I'm looking at redoing my 10 year old HELOC to do water damage repair from a chimney leak on my house. My Heloc draw down [period has ended Its a log cabin and some logs need to be replaced. Unfortunately they are holding the roof up

!!

!!! I'm going to do repairs MYSELF as contractors charge the equivalent of 300- 400 and hour up here in NH.


Good luck. Most contractors are terrible good luck for you when and ifyou find a decent guy.

 

[IveBeenRued]

Where are people getting the idea that a 401K loan will result in tax penalties? A 401K loan is NOT a 401K withdrawal and will not result in any tax penalties as long as it is paid back. Just keep in mind that you will not benefit from any market gains that may occur while the funds are out of your account.

I personally did a 401K loan for my house down-payment because there was no negative hit on my credit score and the interest that I had to pay was paid to me instead of to a bank. Also for the 6 months that my money was out of my account, the market did pretty poorly so I actually came out ahead after it was all said and done.

 

[ArrestMeRedZ]

Most financial people argue against 401k loans for any reason, but in some cases they make sense. The caveats are make sure you aren't borrowing for current expenses, that you have enough job security to pay it back while working in your current job, and that you have sufficient income to make the payments without fail.
With the problems in your house both known and still undiscovered (you know there will be more suprises), and a house that isn't close to meeting code, I think you are better off selling As Is, and finding a new house. Having to wait for winter to start work with your current contractor should make the decision easy. Just make sure you can make both the house payments and 401k payments until the old place is sold.

If you owe more on your house than its worth in its current condition, you might consider offering the lender a deed in lieu of forclosure, then walking away from the mess. Make sure you close on the new place before doing this. I'm assuming you have no recourse on the seller, home inspector, title company, or your current home insurer.

 

[SwampSurvivor]

Originally Posted By: supton
Originally Posted By: Miller88
What's wrong with the wall?


Top is kicking out in the center. Long story... But you know how rafter ties are used to keep the header plate from being pushed out by the load of the roof? I don't have those. It's a 1.5 story house and no way to put them in. Collar ties might help but I'm dubious. Personally I think it's from windows that someone put in; they cut a bunch of studs and the second story floor joist was being used (with the full length studs) to resist movement.

OTOH the contractor looked at the knee wall upstairs and said that the knee was structural. Like maybe they knew this would happen. Well, it worked for decades but the last ten years appears to accelerating in movement.

That and it's just too dang small. Two bedroom so my son and daughter share, 700 square feet, etc. By today's standards it's poorly built so slapping on an addition seems wrong--the rest of the house would be questionable.



Yikes! That doesn't sound fun. I'd try to sell or pay the place off and sell as is. I have some structural issues with my house that I am fighting currently. The 2nd floor was put on wrong. And then someone cut out the load bearing wall on the 1st floor and cut all the way into the 2nd floor studs!

 

[ArrestMeRedZ]

Oh, and buying a new house will not effect your current first mortgage. The ability to get a HELOC could be impacted.

 

[supton]

The problem is nailing down value--the value is always what the market is willing to buy. If no one is buying then value is nil.

I'm sad as I would have had it paid off in 5 years at our current payment schedule. You'd think that would be huge equity, and it well should be, but with those issues, it does a number to value. On the flip side, the land value is way in excess of the house value, and I should be able to fire sale and still walk away with money. Just not as much as if that darn wall and roof wasn't problematic.

If I could get just the value of my land, after paying realtor and current mortgage, I'd easily pay off a 401k loan.

 

[supton]

Originally Posted By: ArrestMeRedZ
Oh, and buying a new house will not effect your current first mortgage. The ability to get a HELOC could be impacted.


That's what I was starting to get a feel for, that a HELOC might not go as high as I need it to. Just wanted to make sure that was true.

Obviously I'm collecting my data as to what to do.

 

[Wolf359]

Originally Posted By: supton
Originally Posted By: ArrestMeRedZ
Oh, and buying a new house will not effect your current first mortgage. The ability to get a HELOC could be impacted.


That's what I was starting to get a feel for, that a HELOC might not go as high as I need it to. Just wanted to make sure that was true.

Obviously I'm collecting my data as to what to do.


The owner occuppied Heloc allow you to go to higher LTV, investment property is a lower LTV so you want to get the Heloc while you're still living in it. Depends on the bank. Haven't looked in a while, but anywhere from 80-95% LTV, you just have to figure out what the appraiser says the home is worth.

Buying another home to be a primary has no impact on the first mortgage, they only expect you to live in the home for a year, then you can do whatever you like. Only issue is the debt to income ratio, if you already have the heloc, that lowers the maximum you can borrow. If you're borrowing from the 401k, not sure if that would show up on a credit report as they use that to calculate DTI. Yeah, the run up has been great in the stock market in the last few years so the big issue is missing out on potential gains.

 

[supton]

Getting a HELOC would lower my credit score, but last I knew it was quite high, so a few points of hit should not be a problem. I've wondered about getting the HELOC then mortgage on the second place for that reason. Yet another option I could take.

 

[AZjeff]

Is all this hassle you're going to go through with a HELOC, 401k loan, $30k major structural repairs, worth it in the end? We just did a HELOC to do the sell/buy dance and it's really a mortgage, or 2nd mortgage. The loan app process is the same. You said the house is worth $30k, will it be worth at least $75k to sell when done? If not I'd sell as-is, take whatever appreciation you got in 13 years and use your time on the new property.

 

[ARCOgraphite]

Stick built house EASY repairs. Its just wood.


My log cabin is a NIGHTMARE.
All the local sawmills have gone away; I cant get Kants!

I got a quote for a big job 15 years ago for 22K.

Me and a buddy from past workplace (retired master carpenter and furniture maker - who I paid $300 a day ) did it in a long weekend fri thru sun afternoon.


my total cost 3700.00 Built with 4"x6" posts and includes two big Andersen Windows


Contractor RIP OFF

 

[Mr Nice]

Sell as is. No need to spend so much money on a house with problems.

I have a friend that borrowed $80K from his 401K and repaid loan with no problems or penalties.

I'd seriously considering getting rid of house and keep wife / kids happy with a house they will enjoy.

 

[supton]

How did he get $80k? Borrow from wife's 401k also? Limit is 50% or $50k, whichever is lesser.

Which I can do, that would get me 20% down, and some portion of the closing cost (rest out of savings). Then I have two mortgages until this place sells. How long would that take? Right now, the CMA indicates I would not get my $50k 401k loan back. Fine, sometimes you have to take a loss. I do like this option, as I could buy and move in short order.

The real gotcha is making my house sell. Sometimes you have put money into something to make it go away.