10 year home equity loan questions

[Preston]

We are considering taking out a $150k home equity loan against our primary residence to construct a second home for rent or sale profit. Looking at the 10 year fixed we would around 6.5 % interest and our monthly payment would be $1830 +/_. We own the land that we purchased in 2016, I've paid for the Geotechnical survey report, and my house drawings. I will pay for the $12000-$13000 building permit once we are ready. This house is 1080 sq/ft 2 bed/2 bath on a 1.6 acre lot.

My question is I would like to hear the good or bad about home equity loans. We own our current house that appraises for a lot and no other debt, besides living expenses, food, insurance, gas, utilities. Im a builder and can do a lot of the work myself, besides HVAC and electrical. I appreciate any direction. Thanks

 

[EMAZ]

Still a mortgage on your home…quicker closing, likely no appraisal needed since you own home free/clear (likely use a valuation model), minimal closing costs compared to traditional mortgage, interest rate is higher with short repayment term. Very similar to an auto loan just secured by your house instead of a vehicle. Likely have tax write off of interest since used to improve home (consult a tax advisor on that for sure though)

 

[Mike Islander]

Can you use the land instead of your house as collateral?

 

[Preston]

I don't think so, it would be more like a construction loan then. The land is only worth around 80-90k.

 

[Preston]

Still a mortgage on your home…quicker closing, likely no appraisal needed since you own home free/clear (likely use a valuation model), minimal closing costs compared to traditional mortgage, interest rate is higher with short repayment term. Very similar to an auto loan just secured by your house instead of a vehicle. Likely have tax write off of interest since used to improve home (consult a tax advisor on that for sure though)

Thanks! That makes sense. We were planning to set aside around 18 month of payments to ensure we always had the fun available in case I got injured.

 

[cnelk]

Not sure if this applies but it’s worth a read.
Especially if you’re in a rural area

One restriction is being a GC yourself you can’t built it.

USDA Construction Loans: A Comprehensive Guide for 2024

This comprehensive guide to USDA construction loans goes over everything you need to know about financing your rural home build in 2024. Get started here.

www.mortgageresearch.com

 

[survivalistd]

Have you looked into a HELOC loan ?

https://www.comerica.com/insights/personal-finance/how-a-heloc-works.html#:~:text=A%20HELOC%20opens%20up%20a,credit%20cards%20for%20everyday%20purchases.

 

[rookieforever33]

Are you sure you can build it for that? If the investment goes sour do you want to jeopardize your home? Will potential rental cover all expenses and repairs? Do you really want to rent out a fresh new house? Personally I would do a construction loan and shoot for a quick sale. The landlord gig isnt appealing to me. There is risk no matter how you do it and pros and cons of every option. Talk to an accountant and find out how right offs and taxes will weigh on the plan. Good luck.

 

[Speaks]

Why not a HELOC, seems like a way better fit for this type of scenario.

 

[Preston]

Are you sure you can build it for that? If the investment goes sour do you want to jeopardize your home? Will potential rental cover all expenses and repairs? Do you really want to rent out a fresh new house? Personally I would do a construction loan and shoot for a quick sale. The landlord gig isnt appealing to me. There is risk no matter how you do it and pros and cons of every option. Talk to an accountant and find out how right offs and taxes will weigh on the plan. Good luck.

I can't build it 150k but it will be around $220-$250k with the land purchase from 2016, permits, utilities, Geotechnical, and civil survey, so looking at $220-$250 per sq/ft.
I've looked into construction loans and they want to charge about 2% over (like 8.7% as of Feb/Mar 24) or require me to go through another GC. I asked twice to clarify.
I will probably resell it, rental would be my last option but it would allow me to hold onto to the property if the market was slow and rental rates would cover payments. But really plan to sell. I had a previous renter burn down my house 3 Christmas ago, so I have a sour taste on rentals.

Good point on the accountant, much appreciated.

 

[Throwin Darts]

Have you looked at the home equity line of credit? That way you aren’t paying interest on the full amount day 1 and just paying as your draw for the build?

What’s the rate on a floating rate loan? If you are going to sell the home you might consider a floater and hope for lower rates in 2025?

And finally, is there a market for 1050 sf 2 bed 2 bath on 1.6 acres where you are? I would think 1800 sf with at least 3 beds would appeal to a much larger buyer pool. For a 1050 sf house I’d divide that 1.6 acres to two or three lots and put multiple 1050 sf houses on it.

 

[philos]

You might wanna consider the HELOC option that some have pointed out. In the case of building a home where the cost could vary, establishing a HELOC for higher amount might be a wise choice. You could get the HELOC for say a $200,000 limit. Only use the amount that you need and you only pay interest on that portion of the line in use.

If you go, the HELOC route find out if you can use the line and possibly take a portion of it out on a fixed rate versus a variable rate.

Overall, the HELOC gives you more options and the reality is you could establish it now, leave it at a zero balance and not pay any interest until you use the funds, but you could have it at your disposal to use when you are ready.

Using your primary residence also gives you a lot of flexibility to not be concerned with the constraints of a construction loan.

On the HELOC just make sure there’s no prepayment penalty and no annual fees for that line of credit.

 

[svivian]

Instead of a home equity loan look at doing a home equity line of credit(HELOC). The rate will be around 7.5% and variable but gives you a lot more flexibility. You can do interest only payments or principal and interest. Once your investment property is finished refinance it and payoff the line of credit making it available again for your next project

Typical HELOC will have a 10 year draw period and several financial institutions will do no cost up front but have an early closure penalty.

The other benefit is you only pay interest on what you borrow. So you can get a larger amount to cover any unexpected costs. If none occur you’re not out anything. This also helps with the construction side. You can just draw what you need as you need it and only pay interest on the balance.

In addition, because the loan is not tied to the construction, you don’t have to answer to the bank every time you make a draw or provide receipts.

 

[svivian]

You might wanna consider the HELOC option that some have pointed out. In the case of building a home where the cost could vary, establishing a HELOC for higher amount might be a wise choice. You could get the HELOC for say a $200,000 limit. Only use the amount that you need and you only pay interest on that portion of the line in use.

If you go, the HELOC route find out if you can use the line and possibly take a portion of it out on a fixed rate versus a variable rate.

Overall, the HELOC gives you more options and the reality is you could establish it now, leave it at a zero balance and not pay any interest until you use the funds, but you could have it at your disposal to use when you are ready.

Using your primary residence also gives you a lot of flexibility to not be concerned with the constraints of a construction loan.

On the HELOC just make sure there’s no prepayment penalty and no annual fees for that line of credit.

Beat me to it. Good points here

 

[Breddoch]

If you own the land and can build the house, do you think you can do it for 80% of the appraised value? If so, I would consider using the home equity to get through construction and then put it on its on conventional mortgage. You could put it on a 15 or 30 year and not be tied to your primary residence.

 

[ben h]

I'm looking to do something very similar with a HELOC I have in place on a home I own. I haven't looked through the fine print on my loan yet, but some have provisions that can trigger undesirable events, such as calling the note due, and/or reducing the loan amount after it's been established, so having a HELOC, may not be "money in the bank", so to speak. Be careful you secure enough money to finish the project before you begin. It's often difficult to get loans on properties that are already under construction, in the event you need more money.

I don't know your market, but I'd look to build bigger, to bring your $/sq ft down, although overall cost will be higher. Good job getting geotech, hardly anybody does that on homes in my area.

 

[mxgsfmdpx]

Taxes on second dwelling, high interest loan in your name, hiring property manager or dealing with idiot renters yourself, tax on the extra income from said renters… etc.

Yeah no thanks.

 

[Preston]

Why not a HELOC, seems like a way better fit for this type of scenario.

I want a fixed rate and plan to set aside around 15% incase I get injured or something bad happens to cover my payment for 18-20 months.

Have you looked at the home equity line of credit? That way you aren’t paying interest on the full amount day 1 and just paying as your draw for the build?

What’s the rate on a floating rate loan? If you are going to sell the home you might consider a floater and hope for lower rates in 2025?

And finally, is there a market for 1050 sf 2 bed 2 bath on 1.6 acres where you are? I would think 1800 sf with at least 3 beds would appeal to a much larger buyer pool. For a 1050 sf house I’d divide that 1.6 acres to two or three lots and put multiple 1050 sf houses on it.

Good point on home equity line of credit. I haven't heard of that and will look into it.

I tried permitting a multi family on this lot and city would not allow it since it's sfh area only. I honestly think it will sell pretty quickly based on recent sales and there is nothing under 500-550k available. Most 1500-2000 sq/ft homes that are new are over 650k. This area seems to attract a lot of older couples or smaller families. Seems like there are more single people nowadays than married with kids.

 

[Preston]

If you own the land and can build the house, do you think you can do it for 80% of the appraised value? If so, I would consider using the home equity to get through construction and then put it on its on conventional mortgage. You could put it on a 15 or 30 year and not be tied to your primary residence.

So once it appraises for 80% of its value I could get a traditional mortgage and pay off the remaining balance on the home equity or HELOC and just gave a conventional fixed mortgage? That would be preferred if possible. I will need to talk to a conventional lender. Thanks for the information

 

[insanelupus]

You are living in a home that is paid for, wanting to build on land that appears to be paid for, with a job where you are concerned about injury sidelining you for at least a time.

The land won't go anywhere and will almost certainly continue to appreciate in value.

What is the rush to borrow money on a new construction? If you are going to essentially be the GC, while materials costs will rise as well as electrical and plumbing work, likely also to rise is your income level.

Why not put the money aside you would pay to a lender, in an investment fund for 10 years until you have cash to do the build out of pocket without the loan? You'll almost certainly make more percentage wise vs the loan value percentage.

While it is a slower route, it let's you retain a stronger financial position and gives you options in the future instead of debts that leave you with fewer options and life choices. And if something does happen to sideline you for a time (may the Lord please prevent that!) you and your famili aren't trying to figure out an outstanding debt that is far less of a blessing than you might once thought it to have been?.

If you decide in 3 years you can't live without a new loan/ mortgage/debt, borrowing money isn't a hard process. You can easily jump into it if you wish at that time.