Last week I wrote about the process of upgrading our house. There were 3 factors that we needed to determine:
- How much can we afford to spend on our new house?
- How much will our down payment be?
- When do we put our house up for sale?
Of course, when it comes down to how much we can afford to spend on a house, the bank has a different opinion than I do. I take what the bank calculates with a grain of salt, as I don’t feel that anyone should extend themselves to the very limits of what they’ve been approved for. That being said, the old adage about only spending 2-3 times gross salary on your house doesn’t seem to make much sense in today’s environment either.
The house we are looking to build will probably end up costing us more than I would have liked to spend, however I am happy to say that the final amount shouldn’t come close to what the bank has approved us for. I say “shouldn’t”, because any time you are building a house with some estimated costs involved in your allowances and upgrades, I believe it’s prudent to factor in a contingency fund of at least 10 percent.
Our challenge lies with the down payment. I would like to use all of the equity in our existing house to pay for the down payment on the new house. However we need to declare our down payment to the builder and the bank in advance to starting construction. If we want to continue to live in our current house while we build the new house, we will need to open a home equity line of credit (HELOC). The bank will only lend us 80 percent of the market value of the house, minus the existing mortgage on the house. So, for example if our house was assessed at $250,000 and our mortgage was sitting at $150,000 the bank will only lend us $50,000 in a HELOC.
The house we are building will cost upwards of $400,000 which means we will require $80,000 to satisfy the 20 percent down payment and avoid CMHC fees. Even if we have an additional $30,000 to put onto our mortgage after the sale of our house, we would still have to pay the CMHC fees if our initial down payment is only $50,000 (or 12.5 percent). So what should we do?
There are still many factors to consider, for example when do we absolutely need to be in the new house? My wife and I have talked about this and we would love to be in the new house by this time next year (November 2011). Since it takes five months to build the house we would need to start building by the end of May next year. That also seems like a good time to put our current house up for sale, and gives me about six months to save up a bit more cash.
With so much to think about, doesn’t it seem like the easiest decision would be to just stay put? While that may be true, we feel that this is a great opportunity to build the house of our dreams and are very excited to get started.