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    Please Critique My Idea

    I've posted about my debt situation several times in the past. My wife and I are considering a monumental change. Before we go through with it, I'd like some comments from this forum. First, my current situation:

    Balance Int Monthly Payment
    Mort. 1 $104,165 6.25% $1125 (PITI)
    Mort. 2 (A) $30,000 0.00% $0
    Mort. 2 (B) $40,000 0.00% $0
    CC1 $7,931 8.90% $159
    CC2 $2,706 4.25% $140
    CC3 $2,088 5.23% $195
    CC4 $1,709 20.9% $60
    Van Loan $6,550 4.20% $210

    We owe two different family members a combined $70K on the house we currently live in. Our old house is rented out, and for sale, We are currently $25-30K underwater on the mortgage. Our original agreement with family members is to pay them when our old house sells.

    My proposal is to take out a 30 year morgage on the house we're currently living in. The house is worth about $72K. At 80% L/V ratio, we'd borrow $57,600. I would use that money to:

    1. Pay off all consumer debts (credit cards and van loan), freeing up about $760 in monthly cash flow.
    2. Pay Mort. 1 down by $28K, so it is not under water at current market value.
    3. Pay the rest to family members (about 12% of what we owe them)

    The $760 in new monthly cash flow would be split between the new mortgage, and family members. (assuming new morgage at about $300 per month).

    We have become much more financially disciplined over the past 18 or so months. I truthfully don't see us falling back into the credit card debt problem we've had in the past.

    Even though our family members have not asked to be repaid yet, we feel an obligation to begin paying them back.

    In the future when our house sells, we're going to have to come up with the $25-30K somehow.

    Sometime after the original house sells, we would plan to refinance our new mortgage to a 10 or 15 year payoff.

    #2
    After I posted, I thought a better option might be to pay off just enough consumer debt to free up the $300 per month cash flow needed for the new mortgage. Maybe the 20.99% card, the 8.9% card, and maybe the 5.32% card. And the rest of the $57,600 go to family members.

    Comment


      #3
      Originally posted by Bob B. View Post
      1. Pay off all consumer debts (credit cards and van loan), freeing up about $760 in monthly cash flow.
      2. Pay Mort. 1 down by $28K, so it is not under water at current market value.
      3. Pay the rest to family members (about 12% of what we owe them)

      The $760 in new monthly cash flow would be split between the new mortgage, and family members. (assuming new morgage at about $300 per month).
      Just to be semantically correct, you aren't actually paying off the consumer debt. You are just doing a balance transfer to the new mortgage.

      I'm assuming there is no official record of the family loans. If there is, that would make getting a loan impossible.

      Is the rent on home 1 covering your costs? If not, rather than paying down the loan, I'd probably hold that money in reserve in case you need it. Then when the house sells, you can use it to cover the balance on the loan.

      Do you have a 6-month emergency fund?

      Is there anything that was purchased with that 14K of CC debt that could be sold to recoup some of that money?
      Steve

      * Despite the high cost of living, it remains very popular.
      * Why should I pay for my daughter's education when she already knows everything?
      * There are no shortcuts to anywhere worth going.

      Comment


        #4
        I don't know what your income is, but speaking from experience, unless you qualify for both mortgages *without* counting the rent coming in from the second property, you won't be able to get another mortgage.

        Additionally, I think it's pretty strongly discouraged to roll unsecured debt into a mortgage. Sure it would help you because you aren't currently paying down your mortgage but if you do find yourself in financial distress again, you're going to owe more than the house is worth between the mortgage and family. I understand your desire to repay them, but I don't think its a smart move.

        Comment


          #5
          Originally posted by riverwed070707 View Post
          I think it's pretty strongly discouraged to roll unsecured debt into a mortgage. Sure it would help you because you aren't currently paying down your mortgage but if you do find yourself in financial distress again, you're going to owe more than the house is worth between the mortgage and family.
          This is true. Most advice says not to convert unsecured debt to secured debt. The main reason for that is that typically people haven't changed the bad behavior that got them in trouble in the first place. The majority of home owners who used equity to pay down credit cards proceeded to run the cards up again and found themselves in even worse shape than they started.

          In this case, if OP has truly reformed the money management, I'd be okay with it. Heck, my wife and I have used home equity to pay off debt - student loans and a car loan - years ago.

          The problem here is what happens if the tenants move out (or stop paying rent)? Can you afford the existing loan AND the new loan? You could stop sending payments to the family at that point but will that be enough?
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

          Comment


            #6
            Originally posted by disneysteve View Post
            Just to be semantically correct, you aren't actually paying off the consumer debt. You are just doing a balance transfer to the new mortgage.

            I'm assuming there is no official record of the family loans. If there is, that would make getting a loan impossible.

            Is the rent on home 1 covering your costs? If not, rather than paying down the loan, I'd probably hold that money in reserve in case you need it. Then when the house sells, you can use it to cover the balance on the loan.

            Do you have a 6-month emergency fund?

            Is there anything that was purchased with that 14K of CC debt that could be sold to recoup some of that money?
            Correct, no official record of the family loans.

            Rent on home 1 = $900/mo. so, covers 80% of costs.

            EF = $1,650 so, no not 6 months.

            Basically, no. We haven't added to that 14K cc debt since August 2008. And, when we were piling on CC debt, it was on eating out, clothes, gasoline, a computer that is now 4 years old, and my Master's degree. No new furniture, stereo, plasma TV or anything like that.

            Comment


              #7
              Originally posted by riverwed070707 View Post
              I don't know what your income is, but speaking from experience, unless you qualify for both mortgages *without* counting the rent coming in from the second property, you won't be able to get another mortgage.

              Additionally, I think it's pretty strongly discouraged to roll unsecured debt into a mortgage. Sure it would help you because you aren't currently paying down your mortgage but if you do find yourself in financial distress again, you're going to owe more than the house is worth between the mortgage and family. I understand your desire to repay them, but I don't think its a smart move.
              Household income = 65K

              Comment


                #8
                Originally posted by disneysteve View Post

                The problem here is what happens if the tenants move out (or stop paying rent)? Can you afford the existing loan AND the new loan? You could stop sending payments to the family at that point but will that be enough?
                The hope is that with the new borrowing we would be put into a position to be able to list the house at current market value, and sell more rapidly.

                Comment


                  #9
                  Originally posted by Bob B. View Post
                  Our old house is rented out, and for sale

                  The hope is that with the new borrowing we would be put into a position to be able to list the house at current market value, and sell more rapidly.
                  I'm confused. You said the house was currently for sale. Is it not listed at market value? If that's the case, why not? What's the point of having it on the market at an unrealistic price? It won't ever sell that way.

                  You are currently losing at least $225/month on the property. The longer you keep it, the more in the hole you are.
                  Steve

                  * Despite the high cost of living, it remains very popular.
                  * Why should I pay for my daughter's education when she already knows everything?
                  * There are no shortcuts to anywhere worth going.

                  Comment


                    #10
                    Originally posted by disneysteve View Post
                    Is the rent on home 1 covering your costs? If not, rather than paying down the loan, I'd probably hold that money in reserve in case you need it. Then when the house sells, you can use it to cover the balance on the loan.
                    My thought on sending that money towards the mortgage sooner rather than later - It's at a 6.25% int rate. To reduce the princ. by 28K now would mean $330 per month going toward princ. rather than the $195 per month going toward princ. as is.

                    Also, if I were to park it in a CD, were talking what? 1% or less interest earned.

                    But, yes I see your point in having something in reserve.

                    Maybe 1/2 toward principal now, and 1/2 in reserve?

                    Comment


                      #11
                      Originally posted by Bob B. View Post
                      EF = $1,650 so, no not 6 months.
                      I would pump up the EF before paying down the mortgage or repaying the family. The rental is losing money every month and if the tenants leave, you're really in trouble, or if the place needs a costly repair.
                      Steve

                      * Despite the high cost of living, it remains very popular.
                      * Why should I pay for my daughter's education when she already knows everything?
                      * There are no shortcuts to anywhere worth going.

                      Comment


                        #12
                        Originally posted by disneysteve View Post
                        I'm confused. You said the house was currently for sale. Is it not listed at market value? If that's the case, why not? What's the point of having it on the market at an unrealistic price? It won't ever sell that way.

                        You are currently losing at least $225/month on the property. The longer you keep it, the more in the hole you are.
                        The house has been listed at a price that would cover what we owe on it, plus cover most of the commissions, taxes, etc. (108K). That's why I want to pump some money toward the mortgage. So we can sell it and not have to bring money to the table. We have no money to bring to the table.

                        Comment


                          #13
                          Originally posted by Bob B. View Post
                          My thought on sending that money towards the mortgage sooner rather than later - It's at a 6.25% int rate. To reduce the princ. by 28K now would mean $330 per month going toward princ. rather than the $195 per month going toward princ. as is.
                          Originally posted by Bob B. View Post
                          The house has been listed at a price that would cover what we owe on it, plus cover most of the commissions, taxes, etc. (108K). That's why I want to pump some money toward the mortgage. So we can sell it and not have to bring money to the table. We have no money to bring to the table.
                          You're correct that prepaying the mortgage would save you interest but given your situation, I think holding the cash is a better strategy. Then cut the asking price to market value and when it sells, use the cash to cover the difference between what you owe and what it's worth.

                          Personally, I wouldn't give a bunch of money to the family until the house was settled just in case you need a couple extra thousand dollars at closing.
                          Steve

                          * Despite the high cost of living, it remains very popular.
                          * Why should I pay for my daughter's education when she already knows everything?
                          * There are no shortcuts to anywhere worth going.

                          Comment


                            #14
                            I agree with Steve. If you're going to take out the mortgage, elimnate the step of paying down the 1st mortgage and just reduce the price to something that will make it sell. Then use what you've borrowed to have the money to bring to the table at closing. It doesn't make sense to pay it down before you sell.

                            Comment


                              #15
                              Thanks for all your replies so far DS.

                              What about instead of a mortgage, we were to get a line of credit for up to 57.6K?

                              Borrow maybe 10K now to transfer balances from 2 high int. CCs. Freed up cash flow goes to credit line and family.

                              Once house 1 sells, use credit line to pay off balance due on mort 1, and pay rest to family?

                              Comment

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