October 13, 2004

8:42 AM

New Home Filter: I just bought my home, and want a fence for the back yard. I've received a couple of estimates, but don't want to pay cash, preferring to keep cash on hand for an emergency. Would a loan to finance be better, or a credit card? Are there other options? I plan to pay off within a year.
posted by benjh to (11 comments total)

If you don't want to pay cash, the interest rate is the driving factor. The lower the interest rate, the cheaper it will be in the end. (A home equity loan is not really a good option, IMHO)

Best option - Borrow from a family member. If this is possible, you will be able to pay back the loan with no interest charges.

Second best - Check with each company to see if they offer an installment plan. If they do, try to negotiate a below market interest rate by showing them that you have other options (i.e., home equity loan, personal line of credit, low interest credit card, etc). The interest that they charge is pure profit, so they should be motivated to work with you. They may require a sizeable (1/4 to 1/3) downpayment, with monthly payments for the next year. If it is possible, offer to pay them by electronic funds transfer from your bank - or even your paycheck. Anything you can do to reduce their risk in exchange for a better deal will work in your favor.
posted by grateful at 9:02 AM on October 13, 2004

If you don't have a lot of credit cards already, you may want to sign up for a new one that's offering 0% interest for a set amount of time - if you can find one. Then you can pay it off a bit each month until the 0% interest period ends.

I got a Visa through Chase earlier this year that has 0% interest on new purchases until next spring.
posted by pitchblende at 9:12 AM on October 13, 2004

A home equity loan would actually be a great option, since the interest on it is tax-deductible and because what you're using the money for is in fact an improvement on the home, but you may not have much equity yet, depending on how much you put down. But do not do this if there is ANY chance you won't be able to pay it off, because you could lose your house.

Borrowing from a family member is often the worst option, since the fact you aren't paying interest will be more than offset by the fact that the relative you borrowed the money from will think they are in charge of your life until you pay them back. You won't be able to buy any luxury item without said relative going "Wait, why did you buy that instead of paying me?" When tax time rolls around they'll be there asking "Did you get a refund? Where is it?" They'll enlist your other relatives to stick their noses into your life and you'll be assaulted on all sides by questions about why you bought a new car instead of paying back the loan, and when you tell them "We agreed on $500 a month and I will still pay you $500 a month" they'll say "Well you can obviously afford a car payment so you should have agreed to pay me $750 a month in the first place." You do NOT want to go there. Taking a loan from a loan shark would be less hassle, not that you should do that either.

It is possible, I suppose, that there are reasonable people in your family who would be willing to loan you money. Trouble is, you can't know how reasonable they really are until you owe them money.

Best option is a credit card with a low introductory interest rate (ideally 0%) for one year, preferably one that gives you cash back on your purchases. If you don't have one of those, then yeah, find the lowest interest rate you can via any other loan. Remember, since you can deduct interest on a home equity loan, that's going to end up being 20-25% cheaper than its given interest rate, so compare accordingly.
posted by kindall at 9:24 AM on October 13, 2004

And then your mom is gonna look over your shoulder, and she's gonna say, "Why are you writing online about that money I lent you, to total strangers?" And you're gonna say, "Get off my back!!" and you'll storm out of the house. And you're gonna forget your car keys inside, so there'll be this really awkward moment when you have to go back in to get them...

Seriously, though, I've successfully borrowed money from family and friends before, and if you careful about who and how, it can work out just fine. It is important to work out a payment schedule and stick to it, but if they're getting repaid at a fair rate, they really shouldn't have anything to say about the rest of your finances. (If they do, I think you've got a whole other set of issues to worry about.)

One of the issues to take into account, at least in the area where I live, is that the cheapest way to get a fence put in is to buy the materials, and then hire some local handymen to actually put it in. (They can usually do it for about half what a fence company would charge for the labor.) They don't take credit cards, usually, but you can save a chunk of change.
posted by LairBob at 11:21 AM on October 13, 2004

kindall- good points, all.

I should have added a caveat about borrowing from a family member. Agree to a repayment schedule in writing, and don't stray from it.

The trouble I have with a home equity loan (in this case) is that there is often a minimum loan amount, which may be more than you want to borrow, a minimum payback period, which may be longer than you want to make payments, and a real interest rate that costs more than a 0% loan or 0% credit card.
posted by grateful at 11:31 AM on October 13, 2004

Have you considered taking the money you would use to pay off the fence in a year and saving it instead of making payments, then paying cash for your fence a year from now? That way you get any interest you earn instead of paying it. If you are in a hurry, waiting even a few months to save as much of the cost as you can would be good. You would have a hard time getting a 0% loan for something like a fence in most areas, but if you can,go for it. Just make sure you have the discipline to pay it off on time or even a little early, because those deferred finance charges add up.
posted by TedW at 11:58 AM on October 13, 2004

That's definitely true, grateful (and I wasn't trying to be snotty, kindall--it just seemed like a hilariously specific projection of what benjh would go through..the kind that's grounded in personal experience).

A home-equity loan is an awful lot to go through, and a big commitment to take on, for the sake of a fence, especially if you've got the cash on hand. If you're doing other substantial work around the house, that'd be one thing, but unless you put a ton of money down when you got the place, I'd be surprised if you're really going to find any equity offers available. I live in one of the hottest real-estate markets in the country, and the rule of thumb around here is still that it's usually 5 years or more into your ownership before it makes sense to look at a home-equity loan.
posted by LairBob at 12:10 PM on October 13, 2004

The trouble I have with a home equity loan (in this case) is that there is often a minimum loan amount, which may be more than you want to borrow, a minimum payback period, which may be longer than you want to make payments, and a real interest rate that costs more than a 0% loan or 0% credit card.

... and ...

A home-equity loan is an awful lot to go through, and a big commitment to take on, for the sake of a fence, especially if you've got the cash on hand.

Some lenders will give you a home equity line of credit, and either a checkbook, from which you can write checks in any amount you want up to your credit limit, or a credit card that draws on this line of credit. The hassle is all front-loaded; after you have the line of credit, you can use it for anything with minimal rigamarole. They bump up your limit as your equity increases.

Taking an individual home equity loan just for a fence may be dumb, but getting a home equity line of credit might be useful for that and other things. That's assuming you have any equity to begin with, of course.
posted by kindall at 1:56 PM on October 13, 2004

How do I determine if I have 'equity'? Is it based on my appraisal, my mortgage amount?
posted by benjh at 2:03 PM on October 13, 2004

The "equity" folks are talking about is basically (_basically_) just what you described...the difference between the value of your mortgage, and the current realistic market value of your home:

1) Let's assume you buy a home for $300K, and you put 20% down. At the moment of purchase, assuming that you didn't either get ripped off or find an amazing bargain, you've basically got $60K in equity ($300K - $240K mortgage).

2) As a general rule, lenders associate your equity share with your overall solvency or financial health--for the same reason a credible mortgage lender won't let you buy a house with 0% down, a credible home-equity lender won't let you borrow out the last 15% or so of your own equity. (Bad lenders will, gladly, but only because they're willing to take away your house if you over-borrow.)

3) Going back to your situation in a new house, unless you either took out a lot less mortgage than you needed to (like you put 50% down), you probably need to sit on your investment for a while, and wait for two things to happen before a home-equity loan is a good idea...
-- you pay down a chunk of the actual mortgage principal (which doesn't happen for a couple of years), or
-- your house appreciates enough in market value that the relative mortgage share goes down meaningfully

It is possible to go back pretty quickly and get a small home equity loan against that first sliver of daylight, when you've maybe gotten a $10-15K lift in home value, but it's not generally a great idea. Most (not all but most) lenders willing to talk to you that early are going to encourage you to take out more, which is not a great idea.

Again, as a general rule, it's not a good symptom for your share of equity to actually trend downwards. Not only is it not a good indicator of fiscal discipline, it could even hurt your broader credit rating if someone like a car loan lender saw you were keeping yourself leveraged to the hilt on your house, instead of letting your equity grow. (The "lend-at-any-cost" credit card lenders will start assaulting you with offers, though, once they see you're willing to borrow more than you really should.)
posted by LairBob at 2:36 PM on October 13, 2004

How do I determine if I have 'equity'?

Equity is simply the difference between how much you owe on the house and how much it's worth. It's how much of the house you own. Typically a bank will loan you an amount roughly equal to your equity, since they know they can, as a last resort, get their money back by selling your house. Basically, as you pay down your mortgage, you can borrow against the amount you've paid off, plus the amount the value of the house increased during the period you've owned it. So if you've paid off $20,000 of the house's value, and the house has appreciated by $25,000, you can probably borrow around $45,000. You will probably need to have an appraisal done to determine the current market vaule of the house before you can get a home equity loan or line of credit. BTW, this type of loan is basically what used to be called a "second mortgage."
posted by kindall at 2:43 PM on October 13, 2004