Real Estate Investment Loan Rates

Real Estate Advice Needed… What to do with low interest loan?

Scenario is that we’re buying a bank owned $187k home, which sold for $189k in 2004. Good credit so rate isn’t a concern. We don’t have anything to put down so my parents offered to help out and want to give us 20% of the sales price as a loan, which we could use as a down payment or to fix up the house or a combination of the two. The house is livable and seems structually sound (inspections to be done) but we could easily spend $20k on the kitchen/baths/flooring. Its in a nice neighborhood and the house is one of the “less nice” houses in the neighborhood. Its a great investment home from my perspective. So if my parents loan us $40k my thought is that we should use half as a down payment and to secure a better rate and the other half to fix up the home. We will be in the house at least two years, probably more like four or five years.

a word of advice on the two issues at hand. Forgive the math, as it is just an estimate, but the idea still comes across.

downpayment
It is best to put down as little as possible on the downpayment, unless you are putting down 20% (to avoid mortgage insurance). Every $1000 you put down only changes the mortgage payment by about $7 on a loan that size. The more unnecessary capital you tie up in the mortgage, the less you have to work with, and aren’t really gaining an advantage with the payment reduction.

Consider this. If you put down 10% or $18700, your payment would be roughly $1700 depending on your interest rate and taxes. If you put down 5% or $9350, your payment would be roughly $1763, but you would have an extra $9350 in your pocket. How long would you have to pay that extra $63 every month before it amounted to the money in hand? About 12 years. Since you aren’t going to be living there even half that long, the lower downpayment makes a lot more sense.

Remodeling
If you are remodeling to improve the quality of the home while you live there, then do it now. If you are doing it to increase the resale value, do it in the year you will sell. Most improvements offer the highest return on value if they are recent. Think about this. Would you rather buy a home that says “recently remodeled kitchen”, or “kitchen remodeled 5 years ago”?

Building Investor Clients and the OC Real Estate Market

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