- The Washington Times - Thursday, September 1, 2005

Q:My husband and I are considering purchasing a cabin in rural Virginia with a

price range between $140,000 and $180,000.

The real estate people in the country referred us

to a local bank, and we

were quoted a rate of 6 percent with a five-year balloon and a 20 percent down payment requirement.

We don’t think these terms are very good and are considering obtaining a home equity line on our primary residence to finance the

cabin. We were hoping to put a minimum of 10 percent down, as our income and credit are excellent.

We have a first-trust balance of $230,000 at 6 percent, and our house is worth at least $700,000.

Do you think this is a good idea? My husband doesn’t like the idea of an equity line because the rate is variable.

A: I think you are on the right track by considering borrowing against your primary residence instead of the country cabin.

Many folks who buy either an investment property or a vacation home automatically think the financing must be secured against the property being purchased. Not true. In any situation that requires mortgage financing, it’s best to take a step back to examine the big picture and look for alternatives.

The equity in your primary residence is equal to its market value minus any existing mortgages. In your case, that equals $470,000 — plenty of equity to tap in order to buy your cabin.

Your husband has a point. Most home equity lines of credit (HELOCs) carry an interest rate that’s tied to the prime rate. The prime rate moves whenever the Federal Reserve and its chairman, Alan Greenspan, decide to move short-term rates.

Mr. Greenspan has not made a secret of his intent to continue nudging rates north. So I agree with your husband — $180,000 in mortgage debt that carries a variable rate might not be the best move at this time.

What about refinancing with cash out? Although the Fed’s latest rate increases have caused short-term rates to rise significantly, long-term rates have moved up only modestly.

As of this writing, I see that you should be able to find a 30-year, fixed jumbo loan in the amount of $410,000, which would be enough to pay off your old loan and obtain enough cash to buy the cabin at about 6 percent with no points.

Such a scenario might make sense. The rate is no higher than the rate on your current loan, and your costs are limited to typical closing costs.

Paying points would allow a lower note rate, but remember that one point is equal to 1 percent of the loan amount. That’s more than $4,000 for each point.

Let’s continue thinking outside of the box. There’s never any harm in periodically re-evaluating your objectives.

For example, ask yourself whether a 30-year fixed-rate loan best suits your objectives.

A 10/1 or 7/1 ARM, which carries a fixed rate for either 10 or seven years, will carry a lower rate than a 30-year fixed program. If you plan on moving and selling your house within such a time frame, these programs are more suitable.

A good loan officer will be able to lay out a menu of programs and help you choose the best one. At any rate, I see several advantages to buying your cabin through cash-out refinancing of your primary residence:

• You would have the option to borrow up to 100 percent of the cabin’s sales price. A mortgage secured against the cabin would carry far inferior terms with a down payment of less than 20 percent.

• Depending upon your objectives, you may be able to improve the terms on your existing debt by lowering the rate.

• Most important, you would be able to make an all-cash offer, giving you leverage with the seller and possibly striking a more favorable price.

The bottom line is this: First-trust mortgage loans secured against primary residences typically offer the best terms and more choices. For folks like you who have enough equity to tap, this is usually the best course of action.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail ([email protected]).

LOAD COMMENTS ()

 

Click to Read More

Click to Hide