Read Estate: Never pay off land?

[ErnestGoesToWSOP]

Hi Jamazon,


I think I can explain the refinancing concept to you. I'll use my current situation with land I bought and a home I am building on the land. I have considered moving into the home myself and selling it as well. Whichever option I choose will have major tax implications.

I bought the land for 200k and I project to build the home for 300k and in my current market I could sell the home for 675k-750k. My profit would be about175k if I sold it right away with a 35% tax hit of 61k. So I would take home about 114k.

I could also sell my old house and move into the new home.
I would refinance and pay off my construction loan and land loan of 500k. I would be making payments on the 500k loan but my house would be worth 675-750k. I could then open up a home equity line of credit on the value of the home and could have access to about 200k of equity in my home to reinvest in more projects. I wouldn't be taxed on this money, I would only have to pay interest on the equity i used. I also believe that the interest on a HELOC is tax deductible.

As far as putting a down payment on your home, I would highly recommend doing 100% financing via an 80-20 loan.
When I bought my first home, I considered putting 10% because I thought you HAD to put a DP on a house. Not true.
My mortgage broker did some calculations and my mortgage payment was almost exactly the same if I had two loans(80%-20% loan) or if I put 10% down and financed the remaining 90%. The reason the payments were the same because I eliminted Private Mortgage Insurance since they viewed my 20% 2nd loan as a down payment.

Now if you lack discipline and feel the money is better locked up in your home, then go ahead and put a big down payment, but most investors can get better than 6-8% return.
For me the money is better used doing more projects, buying more homes, and playing in the stock market. I hope I helped.

-Ernest