Second mortgage for seller-financed home.
By
on
April 22nd, 2008
I love reading the advice here.
My wife and I are planning to buy a home in Indiana from our parents, which they own without a mortgage. We’re planning to let the parents finance the sale to us (at a reasonable, IRS-approved, rate).
The current value is about $350K. The home is about 20 years old. It is habitable, but needs repairs (roof, carpet, new mechanicals, cosmetic fixes, etc.) which should rapidly increase its value by 10-20%. We plan to buy the house as-is. We have the $30K for repairs.
Immediately after that (or during, if possible), we’d like to remodel the kitchen and baths. We will likely want to take a loan (5-20% of the home value) to do it. The parents won’t have the funds for that, so we’ll be looking for a mortgage.
What’s the best course for that second loan.
We don’t want to pay PMI or other unwarranted fees. We have decent credit, 690-710, a low DTI ratio, and good financial reserves.
Any other general advice is appreciated. Thanks.
I seen some answers that suggest a HELOC. I hadn’t thought of that, since I presume the rates will be significantly higher. Wouldn’t a 2nd mortgage make more sense.
RM says:
I would make the upgrades you talked about- roof, carpet, etc and get the house re-appraised.
If the value goes up as you think it will, you can easily get a HELOC (home equity line of credit) from a local bank at a decent rate. You can take out as much as you want as you need it, usually can go up to 80 or 85% of the value of your home (combined with the mortgage you will already have). They have very little costs associated with them to start up, and you can keep them open forever and use it for emergencies and other things.
April 22nd, 2008 at 9:12 am
brandonbroker says:
The best way for you to do this since you have good credit is after you close the loan with your parents is to visit a local bank and apply for a HELOC. Home Equity Line Of Credit. You may want to call your local bank first to make sure they won’t have a seasoning issue. If you buy a house for 350k thats what it’s worth according to the appraisal. It does not matter if it’s worth 700k, it’s only going to appraise for what your paying for it. You won’t have to pay PMI on a HELOC. That would only be on the first mortgage and it’s up to the lender if they require it. I’m guessing your parents will let you slide on that one.
Consider a gift of equity in the agreement depending on what the home is worth.
April 22nd, 2008 at 9:54 am
STEVEN A says:
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April 22nd, 2008 at 10:25 am