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Pay off credit cards or use all of loan for addition?

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bennieray
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Pay off credit cards or use all of loan for addition?  Reply with quote  

Hello all,

I have a mobile home that my sister and her husband are about to purchase, rent to own. I am using the mobile home as a security for a loan from a family member to make an addition to my main home. I am taking there rent to pay back the loan. I am hoping to get a loan of about 25k (using a certified appraiser to make it completely legal). The addition needs to be completed in under 3 years. I will be doing it as an owner/builder (I'm very competent in the trades) and 25k will be just enough. Do I use the 25k for only the addition and continue paying my othe r bills OR pay off my credit cards first (8k) and finish it from my monthly income when I run out of money? My only other bills are one student loan at 10k and a car payment (only two years left to pay). I could actually pay everything off...VERY tempting, lol. What yall think?
Post Mon Dec 07, 2015 5:30 am
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vaynganhang19
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The best is Loan, CC really not good
Post Mon Dec 07, 2015 9:48 am
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oldguy
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I had to laugh when I saw your occupation. I'm a landlord of over 40 years, and an engineer.
First, the Law of landlording - never rent to an acquaintance, a friend, a co-worker, and NEVER ever to a relative. Add to that - rent-to-owns notoriously fail (and especially true if relatives are involved). A couple more - never change the as-built footprint of a house, that lowers its market value, causes structural problems when the settling rates vary, the roof/wall interfaces leak, etc. Most landlords will buy only as-built houses, no additions.

As for borrowing money from relatives - why? It makes for some tense Thanksgiving Dinners - and for what? US mortgages are 4%, fixed rate, 30 years, capital doesn't get much cheaper than that (and I'm sure that your uncles got better things to do with their money that loan it out at less than 4%? I use the Mortgage system for all of my houses, always 30 yr FR, no designer loans, no 15 yr loans, no ARMs, no balloons.
Consider that the generic US Stock Market average longterm return is 11%/yr, has been for decades. You would know, F = 1.11^30 = 23, you borrow capital at 4% and place it at 11% for 30 years, that's how you turn $100k into $2.3M. (I borrow against my houses and invest in an Index).

I would scrap the 'addition p[an', if you need a bigger house, buy one and sell your current house, that will add more to your net worth than building. Remember, spending $25k to make the addition is unlikely to add $25k to the appraised value, probably only $10k or $15k. (I've seen additions that actually detracted from the value).

As for the rent-to-own w/ your sister - you'll have to live with your agreement. And keep your fingers crossed that they will eventually own the mobile home and that it won't end in a lifetime of tense relationships. (You'll want to eat some costs to maintain peace.) And in future business dealings, think in terms of "formal arm's length deals with strangers".
Post Mon Dec 07, 2015 5:24 pm
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bennieray
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I appreciate it oldguy. My wife and I had the same feeling about renting to my sister. In fact I have two other buyers lined up in case the paperwork falls through this week. BUT, and this is a big but, my mother and grandmother are living with us and the money from the mobile home was supposed to be to build an additio. However, my mother finally reconciled after two years and will get to see the grandkids if she moves in...si she agreed to move out until the addition is finished IF I let my sister move in. So this is intertwined a great deal. By the way...this is a nice home on the lake that the addition is planned. Considering the above, further comments?
Post Mon Dec 07, 2015 9:14 pm
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oldguy
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quote:
Do I use the 25k for only the addition and continue paying my othe r bills OR pay off my credit cards first (8k) and finish it from my monthly income when I run out of money? My only other bills are one student loan at 10k and a car payment (only two years left to pay)
Considering the above, further comments?


I'll tell you what I do. I maximize my 'long low' loans and use that capital. And avoid 'short high' revolving consumer loans. I keep the 'excess' invested in a Taxable SP500 Index Fund growing tax deferred @ 11%/yr.

Eg, when we get a new car, I could sell about $32k from the Index, use $2k to pay the cap gains tax on the profit, and use the $30k to pay for the car.
Or - I can leave my $32k invested, get a 100%, 5 year loan at about 4% or 5% (ie, pay ~$33,000 over time). Also sell the old car privately for about $4000 and add that to the Index. So I have that $36,000 still invested - using the Rule or 72, I expect the $36k to double to $72k in about 6 or 7 years (sometimes it does worse, sometimes better, but over a few cars it averages 11%/yr).

In your case, I would refi the Lake House to max (as close to zero equity as you can), use the money to pay-off the revolving consumer loans, and use the remainder to build the Addition. Keep the car loan for the full term. If the SL is <6%, it's a keeper. If not convert as much as you can into a 'long low' loan.
Post Mon Dec 07, 2015 11:23 pm
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