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Is this a Good Idea or not?

Home ▸ Archive ▸ Serious Business ▸ Is this a Good Idea or not?
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Aug 4, 2010 1:10 PM
So my best friend of over 20 years works for a Well Known bank. He called me up today knowing that my Wife and I are looking to sell our current house and build a new home sometime within the next year hopefully. He offered me the following.

Essentially a Line of Credit worth the Amount we owe on the house. So essentially getting rid of the mortgage but using a credit line with an Interest Rate of 3.5% which is definitely lower than my mortgage of 5.25%. What he is suggesting is that we take this line of credit and either do one of the following.

Continue to pay what we normally do for our mortgage and apply the extra money towards our principal which over the course of one year will pay about $14,000 towards our principal and only make minimum payments on the Line Of Credit.

Or Just make minimum payment and save the extra money to use as a down payment for the new house

Does this make sense and has anyone here tried something like this before?
Aug 4, 2010 1:10pm
F

fan_from_texas

Senior Member

2,693 posts
Aug 4, 2010 1:15 PM
Fixed or variable? What are the closing costs? Any prepayment penalties? Is this tax-deductible/secured by the home?

This sounds like the VirginOne mortgages that were offered awhile back. We considered it, but didn't have enough equity to take advantage. You'll have to run the numbers through each possible scenario to figure out if it's good for you.
Aug 4, 2010 1:15pm
S

SnotBubbles

Aug 4, 2010 1:17 PM
If you trust him and he's truly your "best friend for over 20 years," I would say he is leading you in a good direction and to take advantage of it. He's the expert.

My guess though is that he's banging your wife, is going to bankrupt you and ruin your credit....then run off with her and leave you homeless.
Aug 4, 2010 1:17pm
thedynasty1998's avatar

thedynasty1998

Senior Member

6,844 posts
Aug 4, 2010 1:22 PM
SnotBubbles;441545 wrote:If you trust him and he's truly your "best friend for over 20 years," I would say he is leading you in a good direction and to take advantage of it. He's the expert.
This.
Aug 4, 2010 1:22pm
L

Life's a Pitch

Member

79 posts
Aug 4, 2010 1:26 PM
SnotBubbles;441545 wrote: My guess though is that he's banging your wife, is going to bankrupt you and ruin your credit....then run off with her and leave you homeless.

This
Aug 4, 2010 1:26pm
Rider_In_Ttown's avatar

Rider_In_Ttown

Senior Member

246 posts
Aug 4, 2010 1:37 PM
I would do it. Especially if that 3.5% is fixed. If it isn't you do run the risk of it rising to above the 5.25% you are currently paying. But I doubt that will happen over the next year or so. I don't think there are any fees to open a Line of Credit. If there is it is probably minimal.
Aug 4, 2010 1:37pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Aug 5, 2010 9:33 AM
It is 3.5% Fixed. The thing is we plan on moving out within the year anyways to build a new home. So if we take this line of credit. We can either pay off $14000 in principal in a year or just pay the minimum payment and bank the extra $1000 we would get per month and save that for a down payment on a new house.

I think that is the route to go. Realtor thinks we can at least break even on the sale of our house so why put more down on the principal now when we can just save up money for the new house.
Aug 5, 2010 9:33am
krambman's avatar

krambman

Senior Member

3,606 posts
Aug 5, 2010 11:55 AM
http://www.truthinequity.com/

Once you have some equity in your home you can take out a HELOC and usually pay off your 30 year mortgage in about 5 years. It sounds like this is basically the plan that your buddy is trying to hook you up with. I'd check out this website and probably listen to your friend.

If you think you can make more off the sale of your current home than you would save, then pay down the principle over the next year. If you think you'll save more than you would make, then save. If you're not very good at saving or might be tempted to spend some of that money then pay down the principle because you'll get that money back when you sell the house but won't have access to it until then.
Aug 5, 2010 11:55am
F

fan_from_texas

Senior Member

2,693 posts
Aug 5, 2010 3:34 PM
pmoney25;442370 wrote:It is 3.5% Fixed. The thing is we plan on moving out within the year anyways to build a new home. So if we take this line of credit. We can either pay off $14000 in principal in a year or just pay the minimum payment and bank the extra $1000 we would get per month and save that for a down payment on a new house.

I think that is the route to go. Realtor thinks we can at least break even on the sale of our house so why put more down on the principal now when we can just save up money for the new house.

Depending on the amount of gain you would net from your house, you may be better off paying off the extra principal, rather than saving the difference, as you'll be hit with cap gains on investment gains from the saving, but likely not from the principal paid off.
Aug 5, 2010 3:34pm
se-alum's avatar

se-alum

The Biggest Boss

13,948 posts
Aug 5, 2010 3:41 PM
Just save up enough money to pay off your current house, and then don't buy another house until you have saved enough to buy it with cash. Debt is the devil!!
Aug 5, 2010 3:41pm
C

Con_Alma

Senior Member

12,198 posts
Aug 5, 2010 4:39 PM
There are many times when used properly debt is very wise. My partnership created a separate LLC and used someone elses money, "debt" to finance our land and building which we then signed a 50 year lease on.

If/when we sell the practice the lease will have to be bought out or honored. Meanwhile we are depreciating the property and over many decades expect the value to appreciate.
Aug 5, 2010 4:39pm
S

Steel Valley Football

Senior Member

4,548 posts
Aug 5, 2010 5:46 PM
Con_Alma;442807 wrote:There are many times when used properly debt is very wise. My partnership created a separate LLC and used someone elses money, "debt" to finance our land and building which we then signed a 50 year lease on.

If/when we sell the practice the lease will have to be bought out or honored. Meanwhile we are depreciating the property and over many decades expect the value to appreciate.
Con Alma...why no answer to my post about market value the other day? I tried to PM you but I don't think it sent for some reason.
Aug 5, 2010 5:46pm
C

Con_Alma

Senior Member

12,198 posts
Aug 6, 2010 5:28 AM
Sorry. What was the question??
Aug 6, 2010 5:28am
S

Steel Valley Football

Senior Member

4,548 posts
Aug 6, 2010 3:35 PM
The question was: Can we discuss it again on another thread?
Aug 6, 2010 3:35pm
B

beenthere/donethat

Member

56 posts
Aug 9, 2010 11:48 PM
I'm fairly conservative & while the line of credit sounds like a good deal, double-check the terms. I don't know much about them, but as someone else mentioned, I'm sure the equity you have figures into it. The interest rate sounds good, but is the term only for one year, five years or what? If your circumstances change & you aren't able to or decide not to sell your house within the year, do you have to pay off the line of credit & obtain another mortgage. I would think the line of credit would have a mortgage anyway so I wouldn't think you'd be getting rid of your mortgage, just substituting it with another one with perhaps better terms. Again, being conservative, I'd definitely have the extra money going towards principal, especially with the current interest rates.
Aug 9, 2010 11:48pm