Should I pay off 2nd mortgage or save for downpayment?

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Trooper_IHB

Trooper_IHB

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<p>Greetings all ! I have read this blog for the past several months and give many thanks for sage wisdom. Now I have a question of my own that perhaps I can garner a consensus on. I've been struggling with the proper course of action and would like to know what you all think.</p>

<p>Here is my situation:</p>

<p>In 2005, I moved from So Cal to New England due to a family illness. I bought a house in Sept of 2005 because I thought I was going to remain there. When I bought, the market had already cooled considerably there, so I didn't do too bad on the purchase price. I put a large chunk of change down (thanks to my So Cal sale at the peak ! ) THEN I had to return to So Cal due to my job. I didn't want to sell because I plan on retiring to the little place in about 11 years (summer there, winter here is the plan.) I tentatively placed it on the market at an absolute break even price (4% negotiated Realtor commission - yes, they do that in New England ) but only got one sniff in about 2 months. Did I mention that I really didn't want to sell it ?! I didn't want to lose $, so I ended up renting it out for top dollar in my area. This sounds good at face value, but I'm actually in a loss position....not horrible, but still a loss. Alas, I ended up being the proverbial accidental landlord. Thankfully, the tenant I have paid 6 months cash up front to rent it...she has paid on time ever since. Phew. </p>

<p>Nuts and Bolts : I have a 1st mortgage (188K) at 6% fixed - 30 yr...that I'll keep in place. I also have a small 2nd mortgage (25K) at 9.5% fixed - 30 due in 15. Total loss position monthly with the two mortgages (P.I.T.I.) is $422.00 a month. I earn a decent salary and it doesn't hurt me much. If I paid off the 2nd mortgage, I would only be in a loss position of $190.00 a month (with rent increases, this will decrease over the years.) </p>

<p>Here's my question: Should I work on paying off the 2nd mortgage (to save $231.00 in monthly loss), or should I be saving money for a down payment on a place here in So Cal....Palm Springs area to be exact. If need be, I can pay off the 2nd in about 1 year. I plan on treading into the real estate waters again in about 2 years after this mess shakes itself all out. I don't know if it will look better for me to have less mortgage debt (paying off the 25K) OR to have a decent sized bank account. I figure that I can save about 50K in 2 years if I just go on paying the minimums on the mortgages. I know the day and age of stated doc are over, and realize that cash will be king. I can't decide if I should pay off or save for future down payment. Tidbit: I have perfect credit, absolutely no debt (save mortgages) and earn very low 6 figures.</p>

<p>What say you all ? Thanks in advance.</p>

<p> </p>
 
<p>Trooper,</p>

<p>If I am in your position, this is what I would do.:</p>

<p>1. Pay-off the 2nd because you are paying 9.5%.</p>

<p>2. Apply for a HELOC and do not touch it. The money is there for you like a checking account but you are paying $0 interest as long as you have $0 balance. I have been reccommending my client to consider Cal Bank for HELOC. It cost $0 for loan fee. My rate with a bank in New York is Prime - 0.75% ( or 8.25%-.75% = 7.5%). I am pushing Prime - 1% and they are telling I will get it when they run special.</p>

<p>3. For you, apply a HELOC directly with your bank. Your rate will depend on your loan-to-value ratio and your credit worthiness. Make sure you negotiate rate. There should be no fees.</p>
 
<p>Nirvine,</p>

<p>So you are saying to apply for the HELOC for the purposes of a future downpayment ? I didn't think lenders looked too kindly on that. </p>

<p>I don't want to wait more than 2 years to purchase a home here, I'm going to get KILLED in taxes.</p>

<p>Thanks,</p>

<p>Trooper</p>
 
<p>Trooper,</p>

<p>I say apply for HELOC anyway so you have the cushion. HELOC is for you to do anything with it. I would get a HELOC now and pay off your 2nd asap because of the high 9.5%.</p>

<p>If you buy your NEW house now, you will get a HELOC against your NEW house as second. I did not realize you want to buy soon.</p>

<p>Looks to me you are getting a 80/10/10 for your new home</p>

<p>80% First at 6.5%</p>

<p>10% Heloc at around 7.75%</p>

<p>10% cash as down payment. (could be the HELOC from other home)</p>

<p>I hope you make enough to qualify for all these loans. Your loan officer will help you to get your finance in place.</p>

<p>Do you have at least 10% now or you need to save or getting a HELOC against your other house? I do not know what is the equity in your New England home?</p>

<p> </p>
 
<p>Trooper - I saw that you were thinking palm desert area so you may want to take a look at this:</p>

<p><a href="http://www.realtybid.com/lennar/lennar.cfm">http://www.realtybid.com/lennar/lennar.cfm</a> </p>
 
<p>graphrix,</p>

<p>That's just what I'm hoping for, hu ge reductions ! Like I said, I won't be purchasing for about 2 years so prices should be dramatically lower then. I keep watching the "reduced" listings with great delight. I'd say about 3/4 of the listings in Palm Springs alone (1900 + listings!) have been reduced. Seller motivated. All offers considered. etc. Wheeeeeeeee. Thanks for the link and info. I'll watch the auction and see what they actually sell for.</p>

<p>BTW, if you were me, would you pay off the 2nd (let's not dismiss the small tax benefit from having it) or bank the cash for a downpayment. I'm afraid if I spend all my savings paying off the 2nd, I won't have that 10 % to 20 % cash down they'll be wanting. </p>

<p> </p>

<p> </p>
 
Trooper.....if I was in your position I would do everything to pay off that second loan. Then get a HELOC on the home in NE so that if need be you can pull out the least amount needed to offset whatever you have in savings to buy the house in Palm Springs. If you are waiting two years who knows what the housing market or your salary will be.
 
<p>Sorry if this is a duplicate post. It was there one minute, and gone the next. </p>

<p>NIR, I understand your logic about refi on the 2nd to a lower rate, but since I can pay it off in one year I don't think it will be worth the cost of the loan. I know, I know...."NO COST" refi. Bananas. It's built in somewhere.</p>

<p>Mino, thanks for your suggestion. That sounds good. All in all, consesus seems to be pay of the 2nd with a vengance, which is what I shall do. </p>

<p> </p>
 
Well, it took a tad longer than a year....BUT I DID IT ! Just yesterday, I wired my final payment to Wilshire Credit Corporation, the company that services my 2nd mortgage.



I busted my as*, basically working two full time jobs to do it. I have an enormous sense of satisfaction at this very moment.....and just wanted to update this post (which was my <strong>FIRST POST</strong> ever on IHB). My how time flies.



<img src="http://www.fotosearch.com/comp/SBY/SBY144/close-up-two-women_~57445364.jpg" alt="" />
 
Yippee!!!



That's great! What an awesome accomplishment! I'm very happy for you!



GITOC



<img src="http://www.fitkidsnyc.com/sitebuilder/images/ballons-bunt-259x328.jpg" alt="" />
 
<em>Are you breaking even with the rental now? </em>



No, I'm still $190 in the hole every month. When the lease came due for renewal, I just couldn't raise the rent....my tenant is perfect and I didn't want to jinx it.



Now I'll start picking away at the first mortgage and saving in earnest for a downpayment in 2011.
 
Wow Trooper! Congrats! All that time sacrificed and hard work really paid off, literally. You are very much entitled to feel a major sense of accomplishment and deserve to be proud.



Now, the next update for this thread should be when you buy your PS home for deep discount, and announcing when the IHB weekend getaway party is. Try to have it during the spring so no IHBer ends up melting from the summer heat there though.
 
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