Input please!

[IOBA]

We worked really hard to get "debt free" and to live within our means.  A challenge, but done did it!   The challenge was the debt part -- getting out.  It's easy enough to live within our means, usually.

In April, I went to great lengths to reduce our  monthly obligations to eliminating mandatory payments.  Reduced obligations by $350 a month.  Weu weu!

Dilemma -- our place desperately needs work PLUS will have (most likely) relatives moving in (due to financial problems).  Nothing is up to code.  Everything is pretty much 35-40 yrs old.

1.   Need to replace windows that are 38 years old.  Cost 6k.  (Got lots of estimates, read the fine print for financing, choosing our own financing.)

2.   Other necessary repairs/remodel/bring up to code work.  Cost about 75k.

3.   Current debt 26k (medical and emergency repair), no interest, 5 years.

We can borrow the money, 81k, at 4.99% interest, for 2 years.   With that money, some smart moves, we can get everything done that needs to be done.  Our place up to code.  Separate living space for relatives.  DH was all for it until he talked to a guy who mentioned Robert Prechter.  Now DH is saying, hey, let's not go into debt to do this and just save up and pay cash.  

Um, honey?   It would take us YEARS to save up that kind of money!   Realistically, I can not even fathom how long it would take to save up that kind of money.

There is a chance we could borrow 50k or less from his parents, zero percent interest, 5 year payback.  But he doesn't want to bother them.

Sooo...please advise.  I can borrow the money on my own and get the repairs done by a licensed/insured contractor.  Or I could see if DH will change his mind.  Or I wait it out until it's a vital emergency.  So far, vital emergencies have cost this year and last year.  We are really good about maintaining what we have, but you know, when an appliance is 30 something years old, it will expire eventually; pipes are going to leak; the roof will leak...

There is no way we can do the work ourselves or by family members.

Oh - can we pay it off in 2 years?  Um, not likely, but then again, I have been known to work miracles.    Can we afford the payments?  I'd find a way.  The payments would be 2k a month.  If the relatives move in, that would be monthly income that would offset the payments.  Definitely doable then.

Thoughts?

[haulingthescoreup]

My main thought is that for something like this, you both have to be on board with whatever you decide. I wouldn't do anything just in your name. Marriage is a partnership, and you need to pull together equally.

Who's Tom Prechter, and what does he have to do with your family's affairs? Just curious. The 4.99% plan made sense to me. Borrowing money to improve your home makes sense, even for those who don't believe in revolving credit (credit cards.)

If it would be a hardship to his parents, I would leave them out of it. On the other hand, if they have money languishing in 0.55% money market accounts, you might approach them with the offer of 3% or 3.5%, something that would benefit them while allowing you to make the payments comfortably. Put it in writing with protections for them.

Are the relatives who are moving in from his side of the family, or yours?

[Anonymous]

If I may take a stab at this I think I have missed something or there is a typo. From your post you said you could borrow the 81K @ 4.99% for 2 years. You then said it would be $2000 a month for the payment. When I run the numbers for borrowing $81K @ 4.99% for 2 years I get a repayment amount of $3553.22 a month. That is a huge difference. So either one of us has the math wrong or there was a typo in the post. Please check that. At either rate $2000 a month or $3553 a month is a lot. $81K to repair your home is also alot. But that depends on where you live and what your house is like. Unless you have a huge or high valued house $81K seems like a lot to put into it. Have you thought about just looking for a new house? If you own that one outright you could sell it and use that as a downpayment and get a new house. Now if you have a $500K house or something that $81K might not be so bad I just hope you arent going to pump $81K into a $100K house.

On the second note for that I would not borrow the money from his parents. There have been way to many people end up with bad family relationships over money. Unless it is absolute emergency or very small amount of money I HATE borrowing from family. Its hardly ever worth the risk if something happens.

On the relatives again see my first paragraph if you decided to buy a new house then you would use the money from the old house for a downpayment to reduce the mortgage amount right off the bat. THen if you have people living with you and paying rent that would lower your mortgage payment while they are living with you. But may I suggest lets say you have a $1500 a month mortgage and then for example the people moving in with you agree to pay $500 a month to live with you. Instead of reducing your mortgage to $1000 keep making the $1500 plus put their $500 with it and pay $2000 a month. THis will greatly reduce the term of your mortgage and reduce the amount of interest you will pay totally.

Dont know if you have considered any of this already but that is a lot of money to borrow and a huge monthly obligation to be putting into a house that old unless its something special IMO.

[IOBA]

Robert Prechter is someone who has talked about credit drying up, everything moving to cash basis.  He basically, as I understand it, predicted this recession.  Someone mentioned him to DH and now he's much more interested in saving for the repairs/remodel.

I agree with both need to be on board for the work.  Which we are.  It's just how do we pay for it and when do we do it?

His parents can easily loan us the money to do some of the work.  Yes, it's languishing in a money market account, not earning diddly squat.   My terms are that we have all the terms written out, a signed contract, and automatic payments sent to them every two weeks.  I firmly believe in paying family and friends back FIRST.   It would be DH's relatives that would need a place to live.

It really would takes us years to save up for the necessary repairs.  The only way I can see us doing the work is to go into debt.   We live simply now.  We would just continue to do that.  

Sooo....doing it without parents help, it's a loan, 4.99% interest for 2 years.  We can afford the 2% payments and should be able to make extra payments on the loans.  Balloon payment at the end of two years, but we should be able to handle that --- if we put every penny towards the debt, plus if we have rental income, it may not come to that.  

With parents help, we will still need to borrow additional funds, same terms, but definitely paid off in 2 years.

Total debt 98k, monthly payments (2% of the balance) $1,966.  How we maneuvered to do that -- reduced current monthly obligations by $350 (getting ready to reduce a bit more), picking up sideline work, possible rental income, reduced utilities, improved efficiency with appliances.  Without rental income, we can do it, tightly.

[IOBA]

okstatefan5945  -- good points.  I was busy typing as you were typing.

To clarify -- which I neglected to do in my first post, but did in my second post.  The required  payment would be 2%, with a balloon payment at the end.   Adding all the debt together (current plus future) would be a monthly payment of $1,966.   Yeah, that is a lot, but doable.

It's doable because we have reduced our monthly obligations by $350 prior to this post.  After this post, it will be reduced even more.  If the relatives move in, there would be rental income.  Basically every penny we have, even those spare pennies, will be going to pay off the debt.  We have a tax return coming (or two or three) which would be applied towards the debt.   The goal would be to pay off the debt as soon as possible.

Moving to another place is out of the question.  DH credit score is not high enough to qualify for a mortgage (it's in the low 700's).  We could do VA, but want to save that for our "dream" home in 6 years.   We won't recover what we paid for our place by cashing out now.  We wont' recover our investment (maintenance/repairs/etc) no matter what.  Regardless, we still have to do repairs that will cost thousands of dollars before we could sell.   The work we do now would increase the value of our home some when it comes time to sell.

On the savings issue, if we could save the monthly payment of $1,966 -- could we wait?  No.  Somethings have to be done now. 

Our goal (with this project) is to pay it off before we sell the house and move on.  We looked at home equity loans -- not an option.  They all want steady paychecks with credit scores of 780+.

[haulingthescoreup]

While there are pitfalls in borrowing from family members, as pointed out above, this might work in your situation. They have the money, and you have the understanding of how important it is to be business-like.

My former in-laws (now just my MIL) held/ hold the mortgages of my former SIL and BIL. They've never missed a payment, she gets a steady income stream at a fixed rate, and she was able to help them out in their insane real estate markets (northern New Jersey and Boston, respectively.) The National Bank of Mom and Dad can be a source of mutually advantageous credit in the right situations. Kinda the way real banks used to operate!

I do think that this is going to be an increasingly important part of the post-meltdown economy for many of us. My mother was a muni bond fund fanatic until she got burned by Morgan Keegan. We've already discussed that if I need to borrow a chunk of change, she'd rather loan it to me. I can beat the current market rates for her, and she can beat the rates for me.

And an additional feature of the new economy is multi-generational households once again, yikes. That's what's going to wind up happening with a lot of those two-master-bedroom, 5 BR/ 4 BA, 10 room, two-story-entry monstrosities that everyone seemed to think that they needed back in the 90's. Sorta like an endless Thanksgiving weekend, yikes yikes yikes.

[IOBA]

DH and I sat down over dinner and discussed the whole finance picture again.

I still don't understand why this Robert Prechter guy has influence over what he thinks.  He has not read about him, just heard about him.  We are basically a cash household anyway.   With something THIS big, I don't see a way around financing it.   We have plans to save and pay cash for our dream home in six years, with the VA loan option as an emergency back up to cover the difference.  Not sure what our current home will sell for given the collapsed market, but it should bring in some mula, after expenses are paid.

We came to an agreement.   I have a money program on my computer (Quicken) and used the loan program to figure out amortization.   The terms he is going to propose to his parents are - 

73k, 2% interest, no payment/no interest for the first 90 days, 5 year repayment plan, payments every 2 weeks, automatic payments to their account.   Money would be given to us in installments, as needed.    Each amount would be set up as a new loan.   If we were to get all of the money up front, the payments would be $590.29.  I prefer the money all at once.  DH wants installments.  My reasoning, we can put the money into the bank and let it earn interest (3.5%) while we wait to pay out to contractors.   DH reasoning is that our payments will be lower initially.

We still have our other debt.   The grace period of 3 months, no payments/no interest, would allow us to continue to pay down the current debt.  Current debt is $5500, 4.99%, $18000, 0%.  Obviously, all goes towards the smaller debt, then applied to the other debt.

If parents say no, which is a possibility (although this would be earning them more than they are currently earning on the money and it would not cramp their lifestyle), then we will wait.  Pay off current debt and save like crazy afterwards and pray that nothing awful happens.   We think there is  a good chance, in addition to the financial reasons that they would, because it's their direct family members that would be moving in.   And mom & dad know I am fanatical about paying family back!  We've never borrowed from them, but I have forced siblings to pay them back.

What do you think?

[haulingthescoreup]

Sounds well-thought-out. You might want to look at the possiblity of tying the interest rate to inflation in some manner. Right now, 2% beats what they're getting, but a lot of people think inflation is right around the corner, what with the gummint greenback printing presses running 24/7. His folks might be a bit apprehensive about being tied to 2% for 5 years. (Just as I wouldn't buy a 5-year CD right now.) Maybe if you borrow in installments, you could start at 2% with some sort of adjustment in place for future loans.

At any rate, it sounds like you two are moving forward.

I can see the US returning to a much more conservative approach to personal credit, with very little use other than for homes and possibly car purchases. That would still include what you're trying to do, it seems to me.

[smallfry]

Hey OP Google Robert Prechter if you are curious about who your husband is talking about. You can get one of his books cheap on Amazon if you are interested. Debt free is better any time esp. the way things might be going forward.