TMI - You've Been Warned
What follows is a bunch of numbers. Call it TMI, or whatever, it is what it is. My hope is that you will read it, and possibly think twice about hitting yes on financing. The numbers, even as our interest rates remain low, are absolutely mind-boggling to me and I felt that I needed to share.
What I Wanted (and Still Do)
We had considered a refinance last fall, with the goal of getting cash out to pay for renovations to Cottage East. And in late winter, the talk with Rocket Mortgage started up again, and I really, really wanted it to work.
The house to the east of us is just sitting there. Empty. And houses should be occupied. They should hold laughter and shouting and joy and sleep inside their walls. The kitchens should be full of the smells of baking, of a pot of soup on the the burner, and full stomachs.
And yes, absolutely, I want the extra income and security and choices that income would provide. To me it is a win-win. Provide a safe, well-appointed place for someone to live in, whether long-term or short-term, and make a decent income while doing it.
But the Numbers...
I'm going to share some numbers with you now. Keep in mind that I've found some amazing property deals in my area, but the area is not as nice or upscale as most. Hence the low, low prices...
In early 2013, we bought our house for $95,000. The mortgage was $93,000 after a small amount down. I have inevitably paid extra each month on our mortgage, because I really want to avoid all of the additional interest charges and build equity, so after nine years, we owe around $65k. We also took out a home equity loan in early 2019 for $50k. This helped us finish the renovations on Cottage West, our first short-term rental. It's now down to just under $40k (again, I pay extra whenever possible).
The house appraised last week at $204,000, nearly twice what it was just nine years ago. And just a block away, on 11th Street, there is a house half the size of ours and not nearly as well maintained listed for $250k, so the market here is INSANE.
After jumping through a billion hoops, and submitting hundreds of documents, the mortgage company sent me a revised loan agreement. The highlights included:
$166,056 loan at 3.99% for 30 years
$10,123 to close on said loan (that's 6.1% of the total loan) and nearly $3k more than what they said it would cost at the onset
$108 additional mortgage insurance per month for 11 years due to it being an FHA loan (that's $14,256 in mandatory mortgage insurance with no hope of early payoff, btw)
$49,978 in cash out for the Cottage East renovations
I added the additional mortgage payments and closing costs together. It came to $24,379 in fees.
So, to get $50k, I need to pay nearly $25k in fees? On top of the cost of additional interest fees and a new 30 year loan?
Never mind the fact that we will be able to pay it off in 10 years, that's still an insane amount of fees. I'm basically being charged 50 cents for every dollar I want to borrow and that's not even counting the interest!
I sat down, and began working out my spreadsheet budgets. Now, I'll admit, I'm pretty spreadsheet obsessed, but those spreadsheets and budgets have saved our patoots time and again. I know EXACTLY where our money goes. Both by tracking it through Quicken and by preparing, and adhering to, our monthly budget.
And, weirdo that I am, I have MULTIPLE budgets. I have one titled NOW, and several others that envision us in different scenarios - debt-free, mortgage-free, all properties as long-term rentals, retirement, and more.
And I return to them, over and over. I adjust, I evaluate, I review.
This morning, after seeing the revised loan estimate, I sat down and created a couple of copies of current spreadsheets, so I could know, not just NOW, but what it would look like in three years, or more, if we simply buckled down and saved for the renovations instead of getting a loan and paying 50 cents on the dollar for the pleasure.
Three and Eight Years vs. a Minimum of Twelve
Because our income is relatively steady, I was able to predict how much I can set aside, once any credit card bills are paid off, for the renovations for Cottage East. By the end of 2025, or three years os savings, we can have the $50k in savings, and likely several thousand more. It's a pretty conservative estimate.
I then created another spreadsheet, one that would immediately turn towards paying down the three different mortgage payments we have in order of interest rate...
The home equity loan at 6.5%
Our Belton house (a.k.a. Cottage South long-term rental) at 3.75%
Our home at 3.25%
I have the amortization schedules already there in my Budget spreadsheet file. I did mention I'm a number nerd, right?
The $500 per month home equity loan should be paid off by 3/1/2027 with the added income of Cottage East. Conservative estimates put this at an additional net income of $1200 per month, although I believe it will be twice that. So $1,700 total payment per month will eliminate the balance quickly.
After the home equity loan is paid off, I'll add the $1,700 ($500 equity loan pmt, $1200 extra income) I had been paying to the home equity loan and add it to the regular $800 payment I make each month to Chase for Cottage South. According to the amortization schedule, this account will be paid in full by 5/1/2029.
The last mortgage, our home loan, would then receive $2500 ($500 equity loan pmt, $1200 extra income, and $800 Cottage South pmt), in addition to the normal payment of $600, and be paid off in full by 7/1/2030.
This would make us completely debt-free some 2-3 years before my husband retires. I also ran numbers on savings, and realized it would push our expected savings totals up by a significant amount.
Waiting is Hard, But So Worth It!
I really, REALLY want a new (or at least new to me) car.
I also really, REALLY want central air conditioning, top to bottom, in this house!
I have tons of ideas, dreams, and goals.
But I know this - if we wait, and save for it, we can make it all happen.
In Summary
All of this means that we are not finishing Cottage East this year, or the next, as I had hoped. But we will still get the demo done. And possibly the wiring. We will work on the yard as well, and continue to try and tame it into submission. With some work, we should also manage to get the back fence built and tied into the gate, removing the opportunity for folks to easily access the back of the property via the alleyway. This will also help discourage attempted incursions on the house itself.
And we can work on Cottage East as funds come in. So that it is DONE by the end of 2025, and possibly sooner if things go in our favor. I'm just unwilling to put tens of thousands of dollars into the pockets of lenders for the pleasure of using our hard-earned equity. It seems... short-sighted.
Adulting is hard, folks.