5/02/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Should I borrow money to improve historic property?"

Dear Dave,

I’ve inherited my grandparent’s summer house. It’s a historical house that they’ve always wanted to fix up. It does need some repair work.

Their loan is through a local personal lender and I just assumed their remaining balance of $14,000, but the loan is at 14% interest. The house is valued at $110,000.

I can do most of the repairs myself, except for things like wiring. I’m just wondering if it would be more wise to refinance the original loan to get the interest rate down and pay for the repairs out of pocket or to refinance the loan with a lower interest rate and an increased loan amount and get the repairs done right away.

We’ve got about $2,000 in savings and I do have a little money left at the end of each month that I can use to make these repairs gradually.

Kevin in Salt Lake City, UT



Dear Kevin,

I think I’d check with my local credit union and see if you could get a loan for about $10,000. Then call the lender you owe for the house and ask him how much he’d discount the loan if you paid it off right now. If he asks why he should discount a loan with a 14% interest rate and accept an early pay off, let him know that he has a choice of getting paid off early or dropping the interest rate on the loan. The going rate for current mortgages is around 6%. Now you’re negotiating with this guy and you’re going to win either way. That takes care of this loan.

As far as repairs go, I say take your time and pay for that out of pocket, so you don’t pile on more debt. Keep in mind that I answer these questions with what I would do. I don’t borrow money and I don’t recommend other people do either. I think you can do a slow, progressive rehab on this property and stay away from more debt.

-Dave

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