Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

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DesertMan
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Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Wed Mar 06, 2019 4:05 pm

We found a fixer-upper house that we are considering turning into a forever home. We have excellent credit and no problems qualifying for a ~$170K mortgage to buy the house and a loan for ~$80K for the renovations. But now we have to decide between Navy Federal Credit Union, which is offering a purchase mortgage and possibly equity and unsecured loans to pay for the renovations, and a Fannie Mae HomeStyle loan which would combine the purchase and renovation into a big $250K mortgage.

Navy Fed’s approach is basically like the Russian dolls that have the big doll (mortgage for purchase), middle doll (unsecured) and little doll (equity) inside. Although the rates on the equity and unsecured will obviously be much higher than the mortgage, it is very doable for me to pay off and “knock over” the dolls in the order of highest interest, with the mortgage getting KOed last. I have access to a 401(k) loan that provides up to $50K and which could be used to turn any of the “dolls” into a 1% loan (the actual interest rate is 7% but the 6% is paid back into the plan as an after-tax 401k contribution). The idea is that I take the 401k loan, pay off one of the “dolls,” I pay the 401k loan back, and one year later (the cool-off period between loans) pay off the next highest loan.

On the other hand, the HomeStyle loan would combine everything into a potentially 4% 30 year fixed mortgage. However, there’s no chance I would be able to pay this off for at least 20 years. Then again, I’ve often heard it said on this forum that it is to one’s advantage to lock in a big low-rate mortgage and just leave it alone while one invests the excess money that would have been used to pay it off... a form of leverage that is Bogleheads-approved.

So, which is better: Divide and conquer, or leverage and invest?

Dottie57
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by Dottie57 » Wed Mar 06, 2019 4:51 pm

I like simplicity. The Fannie Mae loan sounds best to me.

Topic Author
DesertMan
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Wed Mar 06, 2019 7:39 pm

Dottie57 wrote:
Wed Mar 06, 2019 4:51 pm
I like simplicity. The Fannie Mae loan sounds best to me.
I got some more info on the rates. Navy Fed will do 3.75% with about $3000 worth of points on the mortgage ($170k). The equity would be 5.75% or so (some part of the $80k) and the unsecured would probably be 8%.

The HomeStyle will require $13000 worth of points to get to 4%. With that much we will have to cut our down payment. With the same amount of points as Navy Fed, the rate will be 4.9%. With no points, it’s 5.75% vs. Navy Fed’s 4.5%.

On both the mortgage and HomeStyle the interest is amortized over the entire loan; there is very little benefit to early payoff. This would not be the case with the other loans.

There is a lot to be said for simplicity. But do you think it is worth a 1.25% rate difference over 30 years?

Dottie57
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by Dottie57 » Wed Mar 06, 2019 7:48 pm

DesertMan wrote:
Wed Mar 06, 2019 7:39 pm
Dottie57 wrote:
Wed Mar 06, 2019 4:51 pm
I like simplicity. The Fannie Mae loan sounds best to me.
I got some more info on the rates. Navy Fed will do 3.75% with about $3000 worth of points on the mortgage ($170k). The equity would be 5.75% or so (some part of the $80k) and the unsecured would probably be 8%.

The HomeStyle will require $13000 worth of points to get to 4%. With that much we will have to cut our down payment. With the same amount of points as Navy Fed, the rate will be 4.9%. With no points, it’s 5.75% vs. Navy Fed’s 4.5%.

On both the mortgage and HomeStyle the interest is amortized over the entire loan; there is very little benefit to early payoff. This would not be the case with the other loans.

There is a lot to be said for simplicity. But do you think it is worth a 1.25% rate difference over 30 years?
What are the points you speak of?

I am not following all of the rates involved with Navy Fed.

Topic Author
DesertMan
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Wed Mar 06, 2019 10:48 pm

Dottie57 wrote:
Wed Mar 06, 2019 7:48 pm

What are the points you speak of?

I am not following all of the rates involved with Navy Fed.
Points are additional origination fees that the borrower can pay in order to get the lender to lower their rate. Of course the money has to come from somewhere—the down payment. It’s a trade off.

Dottie57
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by Dottie57 » Thu Mar 07, 2019 1:34 am

Dottie57 wrote:
Wed Mar 06, 2019 7:48 pm
DesertMan wrote:
Wed Mar 06, 2019 7:39 pm
Dottie57 wrote:
Wed Mar 06, 2019 4:51 pm
I like simplicity. The Fannie Mae loan sounds best to me.
I got some more info on the rates. Navy Fed will do 3.75% with about $3000 worth of points on the mortgage ($170k). The equity would be 5.75% or so (some part of the $80k) and the unsecured would probably be 8%.

The HomeStyle will require $13000 worth of points to get to 4%. With that much we will have to cut our down payment. With the same amount of points as Navy Fed, the rate will be 4.9%. With no points, it’s 5.75% vs. Navy Fed’s 4.5%.

On both the mortgage and HomeStyle the interest is amortized over the entire loan; there is very little benefit to early payoff. This would not be the case with the other loans.

There is a lot to be said for simplicity. But do you think it is worth a 1.25% rate difference over 30 years?
What are the points you speak of?

I am not following all of the rates involved with Navy Fed.
I am familiar with the concept of points just not the amounts you are talking about. 13k of points ! :oops:

FBN2014
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by FBN2014 » Thu Mar 07, 2019 4:50 am

Have you checked out the FHA 203K renovation loan?
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

glennherwig
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by glennherwig » Thu Mar 07, 2019 7:42 am

Do you have any taxable investments? If so you could borrow against those in the form of a Margin loan at Interactive Brokers for 4% or at Schwab you could get a pledged asset line 5 year term loan. I don’t know the interest rate. This might be a good way to go for the renovations

Topic Author
DesertMan
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Thu Mar 07, 2019 7:45 am

Dottie57 wrote:
Thu Mar 07, 2019 1:34 am

I am familiar with the concept of points just not the amounts you are talking about. 13k of points ! :oops:
Yeah, that is exactly how I feel. :oops:

Topic Author
DesertMan
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Thu Mar 07, 2019 7:46 am

FBN2014 wrote:
Thu Mar 07, 2019 4:50 am
Have you checked out the FHA 203K renovation loan?
One of the mortgage brokers is suggesting that but I think rates would be higher.

Topic Author
DesertMan
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Thu Mar 07, 2019 7:48 am

glennherwig wrote:
Thu Mar 07, 2019 7:42 am
Do you have any taxable investments? If so you could borrow against those in the form of a Margin loan at Interactive Brokers for 4% or at Schwab you could get a pledged asset line 5 year term loan. I don’t know the interest rate. This might be a good way to go for the renovations
It might be worth moving my taxable account to IB in orders to do that. But I would have to change my asset allocation (bonds in taxable) to reduce volatility because once you get to 50% leverage or so you risk a margin call. Still this might be workable for some of the Reno expenses.

glennherwig
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by glennherwig » Thu Mar 07, 2019 7:58 am

DesertMan wrote:
Thu Mar 07, 2019 7:48 am
glennherwig wrote:
Thu Mar 07, 2019 7:42 am
Do you have any taxable investments? If so you could borrow against those in the form of a Margin loan at Interactive Brokers for 4% or at Schwab you could get a pledged asset line 5 year term loan. I don’t know the interest rate. This might be a good way to go for the renovations
It might be worth moving my taxable account to IB in orders to do that. But I would have to change my asset allocation (bonds in taxable) to reduce volatility because once you get to 50% leverage or so you risk a margin call. Still this might be workable for some of the Reno expenses.
Yes bonds would make sense. Maybe an etf like TLT that’s oppositely correlated to the market. And you should look in into Schwab PAL they let you borrow up to 75% instead of the typical 50% so gives you more room for a margin call

DrakeSRT
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DrakeSRT » Thu Mar 07, 2019 9:10 am

How do you know how much renovation will cost?
Do you have any experience remodeling homes?

Topic Author
DesertMan
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Re: Fixer-upper home: FNMA HomeStyle vs mortgage/equity/unsecured combo

Post by DesertMan » Thu Mar 07, 2019 1:48 pm

DrakeSRT wrote:
Thu Mar 07, 2019 9:10 am
How do you know how much renovation will cost?
Do you have any experience remodeling homes?
We have competitive quotes on the essentials (roof etc.) and a target budget for the non essentials, since the amount of credit for the renovations is not guaranteed except with the HomeStyle.

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