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Financing a home with credit cards


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Newbie here, really love this site! So many smart people here, I'm hoping someone can point out any errors in my thinking on a plan I've been working on.

 

It sounds pretty wild, but I really think I can finance my next house with credit cards, avoid paying interest and save a lot of money in the process.

 

Here's the situation:

 

I am currently debt free except for one car payment and a $17,000 mortgage on 5 acres of land that I have owned for about 10 years. I want to build a house on the land this summer and over the next year. I have 3 months vacation coming and the plan is to do most of it myself and sub out the stuff I either can't do or don't want to do (concrete work, stucco, electrical and plumbing for example). I grew up in construction and have built a house for myself before.

 

The house will be small, about 1,000 sq ft. I have approached my local bank about financing it but they balk at the owner-built aspect of it. They said it is possible to do, but it would be very iffy and would involve a great deal of extra paperwork and expense. They also gave me a major hassle about my plans to be off the grid and were very concerned about the length of the construction loan. They recommended I be a little more conventional and hire a contractor. I have since spoken to 2 contractors and their average estimate is about $95,000. I'm pretty sure I can build it myself for a tad over $65,000.

 

I have healthy credit scores - average FICO is about 760 with no negatives, DW's is 806. I currently have $30,000 in a savings account that I can use on the project. Counting paying off the mortgage on the land, I need $52,000 more. Since it will take over a year to complete the project, I can add another $10,000 or so from my paychecks. That leaves me about $42,000 short.

 

What I'm thinking about is financing that $42,000 with intro rate credit cards. Between DW and I we could swing the $42,000 without opening additional accounts. Then the plan would be to keep the balances in introductory rates with BTs and pay it down at $1,200 per month. The whole thing would be paid off in 3 years for only $50 more per month that I'm currently paying for rent. If I'm nimble, I won't have to pay any interest at all, or very little. And, I'll save $30,000 on construction costs plus what I save on points, mortgage application fees, underwriting fees, closing costs, title insurance, appraisal fees, and so on. At the end of three years, I'll be mortgage free and have no debts of any kind.

 

To get the process rolling, I will take a Citi check made out to me for $17,000 (1.99% interest with $50 transaction fee) to pay off the land. The land has to be paid off by September because a balloon payment is due then. The minimum payment on the credit card will be $130 per month less than I'm paying now for the mortgage on the land so my cash flow improves immediately. Then, I'll BT the $17,050 into one of DW's zero percent offers. That will leave me the entire $30,000 in savings to finance the first summer's construction. I'll add the $10,000 from my pay during the next year. After that's used up, it's credit cards all the way to the end.

 

As a little bonus, I can run all building material purchases through my cash back reward cards, then PIF with savings or BT to DW's zero percent offers. Our credit scores will take a hit for awhile, but I figure if we end up debt free/mortgage free who really cares about credit scores.

 

It sounds like a plan to me, but I'm worried that I might be overlooking something. Any comments or suggestions will be much appreciated.

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Well...the problem with credit cards is that if something happens, like even miss one payment, you can get your rate jacked up. Then trying to transfer the balance to a better rate card after one mistake can be challenging.

 

Also, if you are maxing out your cards, that would dramatically affect your scores until most of the balances are paid down.

 

On the other hand, you would save alot of money. But I personally think credit cards are too risky to pay with for that amount of money.

 

What about a personal loan?

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Well...the problem with credit cards is that if something happens, like even miss one payment, you can get your rate jacked up.  Then trying to transfer the balance to a better rate card after one mistake can be challenging.

 

Also, if you are maxing out your cards, that would dramatically affect your scores until most of the balances are paid down.

 

On the other hand, you would save alot of money.  But I personally think credit cards are too risky to pay with for that amount of money.

 

What about a personal loan?

 

 

hi CheapDB, thanks for reply.

 

That's a very good point (rate jacking), but I've never been late with any payment. I pay online and follow up to make sure they credited it to my account in time. The cards wouldn't be maxed out. I have $36k in unused credit on my cards and DW has $105k. Most of the BTs would go on DW's. Her score would take a hit, though.

 

The thing that concerns me most is that I would use up all my savings. It wouldn't take long to recover, but there would be a period of time in which I would feel sorta' broke.

 

The personal loan is an option I considered. I could refinance the land and take out some of my equity (the land is worth about $125k), but again I would have to pay a lot of interest. Rates locally for raw land are about 8.5%. That plan, however, would still save a lot of money. Something to consider for sure.

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It’s an interesting concept and I like the aspect of using a combination of savings and credit to accomplish the goal shows commitment.

 

I have purchased some lower priced rental properties by converting a BT into short term financing.

Though my goal was to acquire, rehab and then take out a mortgage on the property the underlying concept is the same.

Converting credit cards to cash enables a vehicle for short term financing.

 

Couple of caveats to consider, your time frame is rather long, you will have to make sure you have sufficient credit lines to either extend an offer and or get another offer to achieve the low rate.

Your right that your credit score will take a hit how much always varies by individual, the thing you have to look at is just make sure you have enough available credit and or capitol in case one of your creditors gets froggy and jacks a rate.

 

Considering that you and your wife have good credit it is potentially a huge “exit plan” strategy; if you have sufficient separate credit lines to cover any issues that may arise.

My other thought is before you do this consider asking your existing creditors for an increase this would help prevent a utilization issue arising.

I.e.: if the $42K maxes both of you out then you probably should look to increase your lines ideally you want enough individually to cover the others outstanding debt with enough cushion to weather a storm and keep utilization in check.

 

You might consider paying more than minimum payments while this negates some of your return if you don’t have another BT offer in the wings I believe it’s prudent if you’re using a large percentage of your available credit line.

 

I would also encourage you to get cozy with a credit union; you may find that converting the loan to some type of fixed loan product makes sense up the road.

 

Of course whenever you deal with property there is an unknown aspect that comes into play, just make sure that you have sufficient financial resources to cover the unexpected and plan for construction delays, insurance issues, weather etc…

 

Best Wishes

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It’s an interesting concept and I like the aspect of using a combination of savings and credit to accomplish the goal shows commitment.

 

I have purchased some lower priced rental properties by converting a BT into short term financing.

Though my goal was to acquire, rehab and then take out a mortgage on the property the underlying concept is the same.

Converting credit cards to cash enables a vehicle for short term financing.

 

Couple of caveats to consider, your time frame is rather long, you will have to make sure you have sufficient credit lines to either extend an offer and or get another offer to achieve the low rate.

Your right that your credit score will take a hit how much always varies by individual, the thing you have to look at is just make sure you have enough available credit and or capitol in case one of your creditors gets froggy and jacks a rate.

 

Considering that you and your wife have good credit it is potentially a huge “exit plan” strategy; if you have sufficient separate credit lines to cover any issues that may arise.

My other thought is before you do this consider asking your existing creditors for an increase this would help prevent a utilization issue arising.

I.e.: if the $42K maxes both of you out then you probably should look to increase your lines ideally you want enough individually to cover the others outstanding debt with enough cushion to weather a storm and keep utilization in check.

 

You might consider paying more than minimum payments while this negates some of your return if you don’t have another BT offer in the wings I believe it’s prudent if you’re using a large percentage of your available credit line.

 

I would also encourage you to get cozy with a credit union; you may find that converting the loan to some type of fixed loan product makes sense up the road.

 

Of course whenever you deal with property there is an unknown aspect that comes into play, just make sure that you have sufficient financial resources to cover the unexpected and plan for construction delays, insurance issues, weather etc…

 

Best Wishes

 

Thanks, 8004me, for the thoughtful reply. I have the credit line and excess income but you are right about all the unknowns that could come up, and many of them probably will. You're also right about the long time horizon making it even more risky - this project will take about 15 months. The saving grace there is that I only need to put $17,000 on credit cards now. The really expensive stuff doesn't have to be bought until next summer. I suppose that I could always go with my plan for now and then take out a conventional mortgage when I get close to completion. I would still save on the construction costs. So many things to think about!

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"The thing that concerns me most is that I would use up all my savings. It wouldn't take long to recover, but there would be a period of time in which I would feel sorta' broke."

 

How long? You'll want to consider this. You don't want to be without some kind of savings/emergency fund.

 

It also sounds like your local bank didn't actually say no, just that it would be harder to do so. You could get a conventional mortgage with the challenging paperwork, maybe even an ARM if you think you could truly pay it off. Just make sure the loan doesn't have a prepayment penalty.

 

You'll end up paying a bit in interest, but the risk factors will be much lower.

Edited by CheapDB
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How long?  You'll want to consider this.  You don't want to be without some kind of savings/emergency fund.

 

It also sounds like your local bank didn't actually say no, just that it would be harder to do so.  You could get a conventional mortgage with the challenging paperwork, maybe even an ARM if you think you could truly pay it off.  Just make sure the loan doesn't have a prepayment penalty.

 

 

It would take a couple of years to recover my full savings. Your reply has made me realize that I probably shouldn't use the entire $30,000, maybe keep a couple of months living expenses at least.

 

You're absolutely right, they never said no to the construction loan. But they made it pretty clear that they like to close these out in 6 months or less. I would have to refinance the construction loan at least once. The loan officer was not able to state with certainty up front that it would be refinanced (has to go to loan committee, etc). Of course, just thinking out loud, I could take the construction loan and if they didn't refinance after 6 months then I could implement my plan.

 

Thanks!

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IMO, i would refi the land loan and take out an unsecured loan for the difference. then when construction is complete i would refi into a conventional mortgage. You can finance up to 60% of value on a land loan typically. given you did the work yourself, you would probably have 20% equity therefore eliminating the need for PMI.

 

DO NOT use cc to finance this project. i've heard lots of people say "i pay my bills on time" but imagine an extended illness and just a couple 30 day lates can trigger universal default.

Edited by midwest newbie
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Welcome to the board, Sunday. I like the way you think! For years, I dreamed about doing something similar so maybe this will give you an idea.

 

You could put in the floor, walls, roof, and any essential utilities like water, electric, etc.... Basically make a "shell" of a house, then move in. Then you could take your own sweet time putting up the interior walls, hardwood/tile floors, drywall, and so on. Maybe I'm oversimplifying and there's some factor I'm missing here, but I've always wanted to try this, especially if I owned the land.

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I can give you a list of people who have done this. I have one uncle in particular who bought up lots of land and built cheap houses with day laborers in Arkansas with his CC's.

 

First Tennessee bank gave him a $100K CL. He owns a convenience store and 2 commercial properties free and clear and his liquid assets are great.

 

He gets back 3-4% rebates on this card every now and then and sometimes more or less depending on the promotions.

 

He used his entire line and got these cracker box houses built on zero lots.

 

Now he's sitting back like a fat rat and he did re-fi the houses with a local bank.

 

Lots of contractors use personal credit lines and even credit cards to secure materials, labour, and services to build homes ALL THE TIME.

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You could put in the floor, walls, roof, and any essential utilities like water, electric, etc.... Basically make a "shell" of a house, then move in. Then you could take your own sweet time putting up the interior walls, hardwood/tile floors, drywall, and so on. Maybe I'm oversimplifying and there's some factor I'm missing here, but I've always wanted to try this, especially if I owned the land.

 

You know, that's an idea that I haven't considered - just get a roof over my head and a functioning bathroom and I could move in and save the $1,150 per month rent I'm now paying. Since I can dry it in by the end of this summer, I could save a year's rent - $13,800. That means I would only have to put about $28k on the credit cards, making the plan less risky. And, I would be debt free in two years instead of three.

 

Thanks, Struggler!

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You could put in the floor, walls, roof, and any essential utilities like water, electric, etc.... Basically make a "shell" of a house, then move in. Then you could take your own sweet time putting up the interior walls, hardwood/tile floors, drywall, and so on. Maybe I'm oversimplifying and there's some factor I'm missing here, but I've always wanted to try this, especially if I owned the land.

 

You know, that's an idea that I haven't considered - just get a roof over my head and a functioning bathroom and I could move in and save the $1,150 per month rent I'm now paying. Since I can dry it in by the end of this summer, I could save a year's rent - $13,800. That means I would only have to put about $28k on the credit cards, making the plan less risky. And, I would be debt free in two years instead of three.

 

Thanks, Struggler!

 

if you do opt to go that route, make sure that you get the clear to move in from the local building inspector. moving in before it is deemed "inhabitable" by them will cost you a lot in fines and penalties.

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I can give you a list of people who have done this. I have one uncle in particular who bought up lots of land and built cheap houses with day laborers in Arkansas with his CC's.

 

First Tennessee bank gave him a $100K CL. He owns a convenience store and 2 commercial properties free and clear and his liquid assets are great.

 

He gets back 3-4% rebates on this card every now and then and sometimes more or less depending on the promotions.

 

He used his entire line and got these cracker box houses built on zero lots.

 

Now he's sitting back like a fat rat and  he did re-fi the houses with a local bank.

 

Lots of contractors use personal credit lines and even credit cards to secure materials, labour, and services to build homes ALL THE TIME.

 

 

i agree it is feesible, but the OP only has $30k in savings and it doesn't sound as though he is in this line of work. Also, it sounds as though the person you referenced is using this for investment purposes or has sold them for a profit - which is not what the OP is looking to do.

 

i will retierate (and rephrase) my advice - rewrite the land loan and do either unsecured loan/CC for the difference if necessary. i would not touch your savings to do this project, but if you must, try to keep it at 50%.

 

my husband does contracting and it is amazing the costs to do these types of projects. AND you never know what might come up. and i worked for a city building inspector and he was known for having them redo things because it was "an inch off". hell, my husband redid a whole side of siding because there was a 1/2 inch variance in level.

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Why not use the money you have from savings, about 20k of it, and about 10k in cc's to get started (you said you needed about 30k for the first summer). Then after you have the basics done, move in and eliminate the rent. During the winter you should be able to pay off the 10k from cc's from the money saved in rent. Then get a conventional mortgage from your bank next summer when you only have 5-6 months left on construction. That way, you eliminate the bank's concern of the extended time frame, you have all cc's paid off, and you still have 10k in savings plus whatever you can add during the winter from paychecks.

 

Plus, as an added bonus, your credit scores won't take the big hit from util. AND your mortgage will be 30k less than if you did a conventional mortgage now.

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The only problem I forsee is how you are actually using the credit cards.

 

Are you going to take a cash advance to get the cash to pay the subs,

 

or are you going to pay them with a credit card the usual way?

 

I believe some cc's DO NOT give the intro rate for cash advances, but purchases only.

 

 

 

Obviously, if you are not taking cash advances to pay for the project, this is all a moot point.

 

 

The only other thing I see is the possible consequences of something catastrophic happening, ie illness, and no longer having a reserve account to cover lost wages. I suppose though, from a risk perspective, if something were to happen you couldn't pay your bills, the CC's are unsecured and hence present no risk to losing the property like a mortgage would.

 

Obscure points here, but worth thinking about. I personally would do it...I think many on here could call me an unconventionalist, but to me, the tradeoff of a temporary drop in scores for interest savings is worth it.

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Wow, these are great ideas.... gives me something to think about for my own plans. the only think I would like to add (if viable) is that you could create an LLC for almost nothing, and have the LLC build the house. You would be the owner of the LLC, but the bank doesn't need to know that. So, you could go and get a loan from the bank that was concerned abot "owner built" and tell them you hired a company to do it.... and you did. But there are lots of other totally workable ideas here. Get's my brain juices going. :angel:

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Interesting idea. I agree with previous posters, though. Financing a house with credit cards is risky.

 

I'd suggest another tactic. Indymac bank has single close construction-to-perm loans at market interest rates. Generally zero down and they pay off your land and finance the construction costs and interest. You have no payments at all during construction. They allow up to 12 months to build, 14 with a free extension.

 

You can either go directly through Indymac's retail side:

IndyMac

 

Or use a loan broker. I'm told that brokers can sometimes have better rates and/or terms.

 

OwnerBuilderFinance

 

Disclaimer: I have no interest in the above companies; we're in the process of building our own home and have come across this in our research.

 

Good luck!

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the only potential issue with that is the building it himself part of the equation.

 

however, I know some larger banks (interfirst for a fact) will allow a self-build if can prove they have been in the industry for over 2 years I believe. they will probably be more open to the idea than a small-town bank will.

 

worth a shot...i know interfirst has the same type of program (constr to perm) and only qualify you once at the beginning. with your scores, should be no problem getting financing. you'll have to use a broker to go through them.

 

good luck!

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I'm having this discussion/problem myself right now. I'm adding a garage w/ bonus room above, extending the kitchen, and adding two half baths. I'm doing all the work myself, thus saving me approx. $70,000.

 

Here is where my experience comes in, so far every bank I've talked to requires a general contractors license number for the loan. So even if the OP did start his own company, if he doesn't have a license number the loan is still not going to happen.

 

What I'm planning on doing (please give advice) is paying cash until I can get the "shell" up and get it dried in. Then get the bank to come out and re-appraise the house and then I'll take out a HELOC to finish the work. Once I finish I get it re-appraised and use the rest of the HELOC to re-fill my savings (if I choose) and pay off the CCs. I'm also using extra money every month to pay off CCs, so I have a extremely extended time line for construction. I make sure that I have enough done to get my inspections so that my permit doesn't expire.

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