Hi Johnny, I've been lurking on your blog for YEARS. I remember: "stay on target" lol. Anyway, wondering why you did a land loan at such a high interest rate to buy this lot? I've bought tons of lots over the years as my husband and I have a habit of liking to build our own homes, ourselves -- I've always gotten a HELOC on my current residence to finance a lot purchase to build a new home. Interest rates are ridiculously low, payment are interest-only like your land loan, but there is no balloon in 3 years? Just curious . . .
Hey Anonymous, long time no hear! Stay on Target? You're an oldie, but goodie!
I was going to answer your very valid questions, but decided the answer was as long as a blog post....so a blog post.
Why did we take a 3 year balloon payment at a very high interest rate?
The short answer is that we did everything ass-backwards. The more detailed answer is:
1) We didn't do our homework
In my last job, I could tell that the company stock was about to crash. So I cashed out 15 years of Mega-lo-corp stock. I had told Wifey of this plan about a month earlier, and she was fine with me deciding the when and how. And the plan was with "some capital", we would commence shopping for a lot on Kauai. What we should have done was search the internet for people who had bought property in Kauai or Hawaii to understand that buying land in Hawaii was not the same as buying land in Texas. Thus, we went into the initial bids on lots assuming very wrong facts about financing. More on that later.
2) The realtor did not do a good job preparing us
When we were physically in Kauai, we met with the brother (a realtor) of the realtor we spoke to on the Big Island the year before. He was very pleasant. But I assumed that since he lived up in Hanalei (North part of Kauai) and we were shopping in the South, that it would be better to work with a realtor who lived closer to the lot or actually in the South part of Kauai. In the end, we ended up with a random realtor. He feigned a bit of ignorance about the financing, but I found that to be VERY hard to believe. He wanted a sale. And he didn't want to scare us off by telling us what the financing would be. He just gave me lists of builders, surveyors, and finance people to consult. He should have spoken up and warned us. I had to get my education about land financing from finance people - but a realtor should have done that!
3) The finance people have no incentive to get you the best loan possible at the smallest amount
They get paid by the percentage of the overall transaction. The bigger the loan, the bigger the payout. We made enough money from the sale of stock that we could have taken something like a 30K loan instead of the $150K we took instead. But then, Wifey played a part in that decision as well.
Now, let's go back a bit here. First, we thought we would slowly work through a limited amount of options when it came to land searches. However, it turned out there were a surprising amount of lots that fit our "under $300K" criteria. As you read, we had many options that we discussed. Often Wifey would glance at my options, and say, "I can't think of that right now. I'm busy with work." And it happened at that time she was overwhelmed with work. And when Wifey doesn't want to look at it, she won't look at it. Or when I force her to stand up, walk 5 feet to my computer screen and look, she's grumpy, annoyed and isn't thinking seriously at what I want to talk about. So, there was a bit of waiting as I had to wait two or three days for her to get serious and look at the lots.
As I wrote earlier, when I asked a lender to send me what a draft loan agreement when we were pursuing the first lot, he said, "Let's hold off on that until you get a signed contract." That should have been my first hint that I needed to dig deeper, but I didn't. I have to tell you that, while Wifey decided Kauai was the place to retire to, I did 98% of the work. I had to get her exasperated-ass to log into her computer (at the end of a frustrating day at work) and do electronic document signatures (which she bitched about over and over until she was numb about it). So, you have to factor in putting getting a grumpy wife to look at lots and sign documents (I'll explain that later).
We spent like one week debating the first lot, which was almost half an acre, but no view before deciding to put a contract out on it - to find out that during the time we were mulling it over, someone came in ahead of us and got the land under contract. So, I had to get a distracted Wifey to get "more enthusiastic" about making quicker decisions with me.
And then, when we found out about the 3-year notes, I turned to her and asked if she wanted to bail?
I then asked if we shouldn't take the entire amount from the stock sale and put that towards the land and take a much smaller 3 year loan?
No. Let's just go with what we agreed to.
But, if we're not going to build for 8 years, that means we have to refinance in 3 years and then in 6 years.
But that's all interest! We won't be building any equity!
We'll figure it out by the end of the 3 years.
In other words, she put on her blinders, didn't want to think of any other options and just wanted to get to closing.
What I didn't get into detail is that even the realtor had warned me that closings in Hawaii typically take longer to occur due to the fact that many transactions are occurring between Hawaii and the mainland. So from a signed contract to closing it could take up to 6 weeks. He agreed with us when we wrote into the contract that we could still bail 3 weeks from the moment the contract was signed instead of the typical 2 weeks since we had to give ourselves extra time for the inspection, which in this case was the land survey (and we needed it). And even after we wrote the extra week into the contract, we had 12 hours to decide whether to continue or bail after we got the survey.
Also, by the time we realized what bad conditions we had for the loan, I did a mental calculation/guess. The time it would take for us to find cash on "our" side (home equity or line of credit) it would have added 3 weeks to the closing and that would have overshot our 6 weeks of contract time. The couple in CA were itchy about the time it would take to close the deal. They sold at a loss and I think they needed the money soon. Also in the end, even with going with local, Hawaiian financing, the contract had to be extended 3 days because the funding was late and by that time, everyone was willing to extend 3 days just to reach the goal line.
Now, a bit of Texas history. Written into our Texas constitution was a statement that your home could not be repossessed by creditors, other than city/state entities. What that meant was that, in a very extreme case, you could declare bankruptcy, quit paying your mortgage and as long as you kept paying your property taxes, your house could not be repossessed by the bank. This was the old "A man's home is his castle" philosophy. As a result, home equity loans were non-existant in Texas. Of course, after many years when the population of Texas grew and many people who arrived from other states said, "This is ridiculous! You need to allow home equity loans. You need to change the constitution!". The realtors were against this, the bankers were for this. And in the end, the banking lobby won out. So about.....20(?) years ago, the constitution was changed, but very strict language was put in it's place that prevented us from going "crazy". This strict language and the relatively short history of home equity loans in Texas is what kept (in my very humble opinion) the housing bubble that popped 4 years ago from hurting Texas as bad as it did the rest of the country.
But as a result of the strict rules, which finally allowed home equity loans, this has an odd effect on your future loans. Here is what happened to us. 8 years ago, we decided to remodel the house. So, we got a Home Equity Line of Credit (HELOC) and then started the major remodel. After the remodeling was done, we then refinanced the home mortgage and paid off the HELOC and had a regular mortgage with fixed, lower interest rate. But, when we opened the HELOC, at the "closing" of the HELOC, the bank (Bank of America) had to legally inform us, "By the regulations of the state of Texas, once you have a loan backed by the equity of your main residence, your Title will reflect that it is based on a home equity loan." So since 2006, ALL titles we've held on our house (we have refinanced twice since then), have had the title:
TEXAS HOME EQUITY NOTE
(Fixed Rate - First Lien)
Okay bear with me here.
So after we finished the closing of the lot, I gave Wifey 1 week to mentally be comfortable and I said, "Hey, why don't we get a home equity loan and pay off the 3 year note and then we can have a fixed interest that is tax deductable?" (the interest on a lot with no home on it can not be deducted from your federal income taxes - I checked with a CPA).
She said, "Sure." And then I contacted our bank, Bank of America and asked for a home equity loan. And that's when the wheels came off.
"Sir, we show that your current title is a home equity and we are not allowed to give a second home equity loan on top of a first home equity loan."
No! No! The loan we have now is a conventional home mortgage loan. It is not a home equity loan!
"Okay...well, then you'll have to get that fixed so that we can proceed. Our rules prevent us from doing so in Texas"
And then the words from the closing many years came back to me:
"your Title will reflect that it is based on a home equity loan"
Then I called up my mortgage broker I've used for 5, 6(?) times. I said, "Hey, I want to refinance. I want money out of the house to pay off this lot in Kauai. I want it to be no cost closing." She said, "Sure, no problem. 10 year or 15 year?"
And the beauty of this is that documents needed for a refinance? They're the same documents I had gathered for the high interest 3-year note for Kauai. So, I had 95% of the documents already scanned into PDF format. I just bombarded her loan processor with email and we closed in 3 weeks. We walked to the title company, wrote no checks for closing and 3 days later got a big chunk of money landing in our savings account and then we turned around and paid off the Kauai lot.
But wait, I had indicated that we only needed something around $30K if we threw in the stock sales money. Well, Wifey wanted a "mental" financial cushion. So 50% of the money from the stock sales went into paying of the Kauai lot along with the refinance. And 50% went into beefing up our "rainy day"fund. Yes, I could have spent more time talking her (maybe) into doing the full 100%. But even if we did that and paid off the lot in 2 years, we still have to wait 8 years for the Boy to head to college before we can start building. With the new note, our house and the extra money used to pay off Kauai will be paid off in 7 years.
When you're married and your names are both on the land and the mortgages, you have to both agree to the money. You understand.
But yeah, basically we did everything ass-backwards.