Building a house, should I pay upfront for Upgrades and Structural Cost?

[jeebuss31]

Hi, I'd want to say everyone here gives really great feedback. Ive been here for a couple of months and met some really nice people. In all, our general goal is to offer wisdom and advice for people that has never been through an experience.

As most of you know from my other post, I'm getting ready to build a house. We're still awaiting for the plot review with the builder to go over structural changes(ex: add 3rd car garage etc etc). By the time we close in 6 months, we'll have 30% to put down. My question is, should we pay for the upgrades and structural changes upfront or just add it to the mortgage and pay for it? IMO, I think paying for the upgrades upfront will save us in the long run, yet still retain the same monthly mortgage amount.

For example:
Method A
Total cost of home is $434,000
Down payment $130,000
Loan amount- $304,000, monthly payments(piti) around $2500

------or--------
Method B
Pay upfront Structural/upgrades- $40,000
Total Cost of home is $394,000
Down Payment- $90,000
Loan Amount- $304,000, monthly payments(piti) around $2500


So in theory, if people have cash to put down on a house, why don't they do method b? It'll report a lower market value(final sale price is lower) and the property tax will be lower. I just wanted everyone's opinion as my goal is to lower property tax and monthly payments.

[jIM_Ohio]

If you need things like an extra 3 feet width in garage, or a 1' wall bump out, those structural changes are best done before building, not after purchase.

example- full bathroom rough in for unfinished basement is $200. Doing this 5 years down the line when we finish the basement would have cost thousands.

[disneysteve]

Jim, I think you misunderstood the question. OP wasn't asking if they should do the upgrades. He was asking how to pay for them.

Certainly, if you have the cash, pay for them upfront. Why pay interest on them if you don't have to?

[jeebuss31]

Originally Posted by disneysteve

Jim, I think you misunderstood the question. OP wasn't asking if they should do the upgrades. He was asking how to pay for them.

Certainly, if you have the cash, pay for them upfront. Why pay interest on them if you don't have to?

You are correct. I'm going to add the rough ins and changes, as these will cost thousands in the future. Just for a 1/2 bathroom rough into the basement-no water lines is $360.00! Laundry tub rough in is $310.
Things are adding up and I figure we might as well pay for these changes and upgrades up front. Then use the rest of the cash for the down payment.

I just want to make sure I understand the benefit of paying the upgrades/changes upfront to the builder-vs- rolling it into the mortgage. Should I put down a minimal of 20% to the loan and the rest into the upgrade/changes?

The only thing I see here is that we won't have as much into the equity. $130k-vs- $90k. However the benefit is we're borrowing less money.

Here is a twist- Let's say I'm selling the home in 5-7 years, which am I better off:
Paying upfront for the changes or let it roll into the mortgage??

[disneysteve]

I just realized that in both of your examples, you are borrowing the same amount, so in that case, it really doesn't matter what you do. You aren't saving any money in interest either way since the mortgage amount is that same. If, in example B, you would be taking out a smaller mortgage, that would save you in interest, but if it is just a matter of shifting money around and ending up with the same loan, I don't see where it matters.

[Like2Plan]

jeebuss31,
Do they base your property tax on the purchase price or the attributes of your home when it is finished? (Or, is it different tax?)

Here, the county puts a value on our house based on certain criteria and they do an annual assessment (it is an imaginary value ). The actual market price on a given house is a different value.

[jIM_Ohio]

Originally Posted by disneysteve

I just realized that in both of your examples, you are borrowing the same amount, so in that case, it really doesn't matter what you do. You aren't saving any money in interest either way since the mortgage amount is that same. If, in example B, you would be taking out a smaller mortgage, that would save you in interest, but if it is just a matter of shifting money around and ending up with the same loan, I don't see where it matters.

now that I see this, I would agree it's a wash.

[Ima saver]

My husband builds homes. We never get a price for a house, because it is then in the builder's best interest to build as cheaply as possible. We give a fair estimate ($110 sq. ft) but it is up to the customer to stay in the price range he/she feels comfortable with.(picking out counter tops, light fixtures, tile, carpet, etc., etc.) ( I meant to say we never GIVE a price for a house) My dh works by the hour and does most of the work himself, plus he gets a percentage of the materials and subcontractors.

[jeebuss31]

Hey everyone, thanks for solid feedbacks. I guess after looking over my math it doesnt matter which way I approach it. It can be frustrating since we're both 1st time home buyer and our realtor isn't great at helping us answering these questions. I only used him for kickback credit for the new house(meaning he shared his commission and applied credit back to the final cost of our home).

Overall, I do understand how they market a house and determine the price of a home: square feet,rooms,bathrooms,house price around you, etc etc.
What I don't understand is that I saw some neighbors that have final sales of $405k and their market value is $270K, which lowers their property taxes. Our lender states the market value is usually a little lower than the final price, but this situation it's a big difference,

[disneysteve]

Originally Posted by jeebuss31

What I don't understand is that I saw some neighbors that have final sales of $405k and their market value is $270K, which lowers their property taxes. Our lender states the market value is usually a little lower than the final price, but this situation it's a big difference,

It really depends how property taxes are calculated where you are. Around here, the tax assessed value has nothing at all to do with market value. We bought our home in 1994. The tax assessed value today is the same as it was then, but our taxes have still gone up each year as the tax rate has climbed. We now pay double the property taxes we paid in 1994.

[jIM_Ohio]

Originally Posted by disneysteve

It really depends how property taxes are calculated where you are. Around here, the tax assessed value has nothing at all to do with market value. We bought our home in 1994. The tax assessed value today is the same as it was then, but our taxes have still gone up each year as the tax rate has climbed. We now pay double the property taxes we paid in 1994.

I will second this- our property is taxed at a rate of around 300k, our appraised value last summer was 372k.

Do not base decision on tax appraisal value, other than can you afford the taxes on that appraisal value.

I would care more what the BANK appraised the house for, not the tax collector. The bank number influences interest rates, PMI and other factors which cost you money every month.

[jeebuss31]

Originally Posted by jIM_Ohio

I will second this- our property is taxed at a rate of around 300k, our appraised value last summer was 372k.

Do not base decision on tax appraisal value, other than can you afford the taxes on that appraisal value.

I would care more what the BANK appraised the house for, not the tax collector. The bank number influences interest rates, PMI and other factors which cost you money every month.

We're working with 3rd federal and I know once we get the blue prints we have to give a copy for their appraising as well. But isn't the interest rate already predetermined? PMI wouldn;t be an issue as we're putting over 20%.