- The Washington Times - Thursday, January 12, 2006

Q:I am purchasing my grandmother’s home for $260,000, which is priced well below

market. My family is giving me a gift of $80,000 for the down payment. The house needs remodeling, and I was wondering if I should refinance or take out a line of credit to pay for the improvements.

I’m also considering buying an additional home with the gift. What do you recommend?

A: I think you should sit down, take a deep breath and establish your objectives. I sense from your e-mail that you don’t really have a sense of what you want to do.

Your situation is simple and can be stated in two sentences: You have $80,000 to purchase a property for $260,000. The property’s market value exceeds your purchase price.

Let’s review a couple of scenarios.

You can use the $80,000 for the down payment and closing costs.

Assuming closing costs total $10,000, it would leave you with $70,000 for a down payment, creating a mortgage of $190,000. A 30-year fixed-rate mortgage at 6 percent would result in a principal and interest (P&I) payment of $1,139 per month. Add an estimated payment for taxes and insurance of $225. Your PITI, or principal, interest, taxes and insurance payment, totals $1,364.

Can you afford this payment? It’s important to determine your personal house payment budget. If $1,364 exceeds your comfort level, you may need to explore other mortgage programs that might lower the payment.

Hopefully, the payment is under your maximum comfort zone because you want to make improvements to the house.

You have asked whether refinancing or taking out an equity loan is the best way to finance the improvements. In your situation, I would suggest that neither is a good option. Instead of buying the house with a $70,000 down payment and then turning around and borrowing more money secured against the house through refinancing or an equity line, it makes much better sense to purchase the property with a smaller down payment and use the remainder of the gift funds to pay for the improvements.

Consider this scenario: Purchase the property with a 10 percent down payment. This would use up about $36,000 of the gift funds, leaving $44,000 to make any improvements. You would finance $234,000. Under a “piggy-back” 80-10-10 financing scenario, where two separate loans are obtained to avoid private mortgage insurance, I estimate the monthly PITI to be $1,950.

Can you afford to pay $1,950 per month? If not, you can always increase your down payment, which would lower your monthly obligation. Also, you should determine if $44,000 exceeds the cost of improvements.

Here’s the bottom line: A good loan officer should be able to help you establish your priorities and affordability range and then create a financing plan that most effectively accomplishes your objectives.

If you are a first-time home buyer, I would temporarily shelve the notion of purchasing an investment property in conjunction with the purchase of your grandmother’s house. Let’s first get you properly situated in grandma’s house.

If you have sufficient income and assets after you make your improvements, you can certainly explore the notion of investing in more real estate.

There’s some wisdom in doing things slowly and deliberately. Diving into the turbulent waters of real estate investment can be a risky venture. Make one deal at a time.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail: (henrysavage@pmcmortgage.com).

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