Refi/cash out, use the cash as a down payment on a new home later??

[Anonymous]

Anyone ever do this? We are getting ready to refi to get out of our high interest ARM. We're debating on whether to add on to our house, or just buy a bigger one in the next year (we're outgrowing our house and need more room!)

If we add on to our current house, we can use the cash out $ to pay for it. If we buy another house, we could just use that $ as a down payment instead.  Any thoughts? Is this un-wise or discouraged for any reason?

Our break even point after the refinance will be around 18-22 months.  We are casually looking at bigger homes, but don't see anything in our area/price range right now.  Just not sure which way we'll go, but wanted to get some opinions from my knowledgeable friends here at myFico.

Any advice is much appreciated!

[Anonymous]

Obviously nobody can help you make the decision to add on to your existing house or buy a bigger one. But, if there is a good chance you will buy a bigger house in the next year, I wouldn't refi now. As you said it would take 18-22 months to break even on the refi. I would just leave that equity where it is and not eat into it with the refi closing costs/fees.

[ShanetheMortgageMan]

Yeah only you can say if it's worth it to add on vs. buy a new home.  If you added on could you change your current home into a home you could live in forever?  That might be the better way to go since you don't have to pay all of the commissions & closing costs associated with selling a home (easily can be over 6% of what your home sells for) and don't have to move (pain in the butt).  If it would only be a temp. fix then I'd suggest you hold off on refinancing and continue looking for homes to buy.  You'd also want to look into contacting a real estate agent so you can find out about how long it'll take for you to sell your own home.

Have you looked at if you can qualify for a cash out refinance or if you can qualify to purchase a new home?

[Anonymous]

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@Anonymous wrote:
Obviously nobody can help you make the decision to add on to your existing house or buy a bigger one. But, if there is a good chance you will buy a bigger house in the next year, I wouldn't refi now. As you said it would take 18-22 months to break even on the refi. I would just leave that equity where it is and not eat into it with the refi closing costs/fees.

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Well, we're definitely going to refi now, no matter what. We got ourselves into a subprime ARM with an 11.99% interest rate a couple of years ago with awful scores. I've been cleaning up our credit over the last couple of months and paying down balances, and managed to bump our scores up a bit. We really need to get out of this loan asap. Since our scores have improved I feel like we need to jump on it and get out of our current loan quick-like.

If I knew for sure we were going to sell and buy bigger later, I'd just do a straight refinance now. But since we're also looking at the possibility of adding on, shouldn't we refi/cash out now? Then, if we do end up finding a bigger house in the next 6-12 months, I'm thinking we could just use the $ for a down payment.  I just wonder what the negatives would be for us if we end up doing that. 

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@ShanetheMortgageMan wrote:

Yeah only you can say if it's worth it to add on vs. buy a new home.  If you added on could you change your current home into a home you could live in forever?  That might be the better way to go since you don't have to pay all of the commissions & closing costs associated with selling a home (easily can be over 6% of what your home sells for) and don't have to move (pain in the butt).  If it would only be a temp. fix then I'd suggest you hold off on refinancing and continue looking for homes to buy.  You'd also want to look into contacting a real estate agent so you can find out about how long it'll take for you to sell your own home.

Have you looked at if you can qualify for a cash out refinance or if you can qualify to purchase a new home?

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If we added on, we would definitely make it a home we would live in forever.  We're talking about adding 2 more bedrooms, 2 more bathrooms, a formal dining room, a media room and a computer loft (2 stories, about 1200 sqft total between the 2 floors.) This would give us a total of 6 bedrooms/4 bathrooms + all the extra rooms. 

We got pre-qualified by Countrywide in January of this year to refi/cash out at 7% (our scores at that time are below in my siggy). We didn't go through with it because we still had a prepay penalty in effect at the time, and I knew it would expire in August and I just couldn't see paying all those extra 1000's of dollars. 

I have not tried to get prequalified to purchase a new home yet. 

I think part of my problem is...I kind of just want a new house! Plus it would be SO much easier (and yes, I know, more expensive) to buy one already built the way I want it, rather than deal with turning my house into a construction zone for months on end.

[ShanetheMortgageMan]

Guidelines have changed quite a bit since 1/08, so the cash out approval you got with Countrywide isn't valid anymore.  You could do the cash out refinance and if you don't end up doing the addition, just use the funds to sell the home if you need to.  However you would be paying closing costs, something that once paid you can't get a refund on.

I hear you on not wanting your home to turn into a construction zone though, when we redid our master bathroom it wasn't pleasurable to say the least.  However if you do the remodel it sounds like you'd have your dream home without having to worry about moving (which if I had to move or do an addition, I'd probably choose do an addition).

[Anonymous]

Wow, that's a lot of space you're adding on. Have you priced out how much it will cost? We went through the remodel/buy new decision process earlier this year. For us, we were looking at 50k minimum to add a bonus room & bath upstairs. Of course it would have ended up being more (maybe much more) than that, once we got into the process. And that still wouldn't have fixed most of the things I want to change about the house - location of my office (I work from home), small laundry room, no pool, no 3rd car garage, etc. Another consideration was pricing ourselves out of the neighborhood if we did all of those remodels -we never would have been able to get anywhere near our investment out of it if we sold. So we decided to go with a new, larger house that already had most of the things we want and all we have to do is paint and redo the kitchen, which will cost us about 9k.

[Anonymous]

I would be leary of the remodel.  I have gutted an entire house and started from scratch, built a house from scratch, and bought 2 homes that were basically move in ready.  That much remodeling will ALWAYS go over budget and there are tons of expenses that people do not count on that are small but that add up.. For example...

how much are you going to spend eating out while it takes 3 months to remodel your dream kitchen

how much are your utility bills going to be while you are ripping out walls, insulation, windows, doors, etc..

Just stuff like that which can anywhere from a few hundred to a couple thousand dollars per month to your construction costs.  Also, estimates are always under what they come out to be...

One other thing, with all the changes, Shane is exaclty right on the mortgage stuff.  You may not qualify for what you think that you do (and you may still qualify)  You need to find out.  Why pay for the refi if you are going to buy ahouse in the near future?  But to make an accurate decision you need to know what your house will appraise for,  what your declareable income is (alot of stuff that in Jan was allowed is not now), what is the balance on the loan, and what is the amount you expect to spend on the refi for the upgrades (add 15-20% buffer for changes and more upgrades...)   It is alot harder to get cash out refi for over 80% LTV than it was 11 months ago.  DO you have enough equity to make it work...And if you do, is it really a better option than just buying an existing or builder home that is already what you want knowing that in this market prices should be fairly good.

In a down market (unless you do all the work for yourself), you can usually find a house that has what you want for less than you cna spend making your house into what you want.  That depends on alot of things, but witht he glut of homes on the market and builders selling homes for cost, and all the time/mess/headache in remodeling it is definitely a loaded question.

[Anonymous]

"It is alot harder to get cash out refi for over 80% LTV than it was 11 months ago."

If this is true, then that brings us to a screeching halt. Our house will appraise for about $135-140k and our balance is $100,700.  That will only give us about $8-12k to cash out...not even close to being enough for the addition.  I guess we need to just sell and buy a bigger home.

Not that I'm too disappointed...I like the idea of getting a new house! I just know how hard it's going to be to sell right now.

[ShanetheMortgageMan]

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@Anonymous wrote:

"It is alot harder to get cash out refi for over 80% LTV than it was 11 months ago."

If this is true, then that brings us to a screeching halt. Our house will appraise for about $135-140k and our balance is $100,700.  That will only give us about $8-12k to cash out...not even close to being enough for the addition.  I guess we need to just sell and buy a bigger home.

Not that I'm too disappointed...I like the idea of getting a new house! I just know how hard it's going to be to sell right now.

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Well the prudent thing to do is to meet with a few real estate agents on a "listing appointment" at your home or in their office, to hear what they feel the best plan would be to sell your home.  Perhaps it's just waiting until Spring when kids are about to get out of school and parents look to relocate over the summer.  You should also look into the other option about qualifying for cash out refinance.  When you have full details about both options you'll have the info required to make a smart decision.