Q: We want to purchase our first home, but as we’re a newly married couple only a year out of college, we don’t have money saved for a down payment.
My husband has some investments (about $30,000) that he inherited which he would like to use for a down payment. With the interest rates as low as they are, would we be better off using less of the stock and putting down a smaller amount, or cashing out the entire amount for a larger down payment plus a few new items for the house?
A: You’ve asked the classic question: When do you cash out an investment to make a new investment (in your home)?
My husband cashed out some stock and used the proceeds to purchase his first home. We used the considerably equity he built into that first purchase to buy our second home, and turned that equity into the down payment for our current home.
I cashed out some stock I bought in 1987 when we remodeled and expanded our home in 1999. Would I have rather kept the stock? Given that the stock market crashed shortly after I cashed it out, no. But you never know that ahead of time.
Besides these real-life anecdotes, the best advice I can give you is to walk the moderate course. Consider selling some of the stock and taking out a slightly larger mortgage. Ideally, you’ll put down 20 percent and avoid paying private mortgage insurance (PMI).
Why? That stock is your emergency cushion. It’s not necessarily in cash, and it’s not necessarily easy to liquidate, and it may not always be worth what it is today (it could be more or less). By keeping some stock, you’ve got a fallback in case something happens.
On the other hand, you probably don’t need $30,000 worth of stock, and could use $15,000 as a down payment or for closing costs. It seems like a good compromise.
Q: My sister, a single parent, has a home mortgage and some credit card bills. Her mortgage company has offered to refinance her home, include her other debt and give her a new 15 year mortgage with bimonthly payments.
Is this a good idea?
A: I’ve removed the name of the lender from your letter because I think there are many bad-apple lenders that offer this deal and it often gets the homeowner into trouble. In your sister’s case, the lender has a lousy track record and has been called a predatory lender by more than one state attorney general’s office.
What usually happens, is the predatory lender offers to roll many loans into one huge loan that is completely unaffordable for the homeowner, who then starts missing payments and ends up in foreclosure or bankruptcy court.
In general, you have to shop around to know if your lender, and it could be any lender, is giving you a deal. I’d feel much more comfortable if you told me your sister had shopped around the deal she had been offered with other lenders, such as the sub-prime divisions of major lenders like Bank of America and Countrywide Home Loans.
If your sister shops around with two or three other lenders, she should get a good feeling about whether the debt she has can be refinanced and how much it should cost.
Another good idea is for your sister to pull a copy of her credit history and credit score, so she knows whether she should be getting a loan with the best rate and terms, or if her credit falls into the subprime” category.
She can go to myFICO.com and purchase the credit history and score for as little as $12.95. It’s a smart move, particularly since many victims of predatory lenders are told they have bad credit (and can only qualify for expensive loans with huge fees) when they have good or even excellent credit.
Q: Should I continue making my monthly mortgage payment now that my home is listed for sale? The agent expects it to sell very quickly.
A: Absolutely. If you don’t make your payments on time, the lender could put the house into foreclosure, and you could completely trash your credit history.
Be sure you make the payments each month, on time, up until the month of the closing. Once the closing date is set, you can decide whether to make your regular monthly payment or wait and arrange for the mortgage to be paid out of the closing proceeds.
How do you decide? First, look to see when your mortgage payment is due. Most payments are due on the first of the month, although you will typically have a 10 or even 15-day grace period. If the closing is set for the 10th of the month or later, then you should make your regular monthly payment. Or, if your account is set up to automatically withdraw your payment and direct deposit it into the lender’s account on the first of the month, you should do that.
However, if your closing falls on the first few days of the month, then it makes sense to pay the amount due out of the closing proceeds, unless you’re in the position to make your payment by the 25th of the previous month (so the check has time to get to the lender, be deposited and clear before the closing).
Your real estate attorney can guide you further. Good luck with your sale.
Jan. 19, 2009.