2million - My Journey to Financial Freedom

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Wednesday, May 24, 2006

Small Liquidity Crisis

Talk about bad timing. I just realized that BOTH my 0% balance transfers expire within days of when I am trying to close on my mortgage. While I have a fair amount of cash, enough to pay off both 0% balance transfers and then some, I don't have enough to pay off both 0% balance transfers, pay a 20% down payment, and pay for the closing costs.

Why put 20% down?
It all works out the same in the end I guess. I could put 5-10% down and get a new equity line for the remaining 10-15%, but that would be the same (or worse) as drawing money against my existing equity line. This way I can avoid any costs associated with opening a new HELOC for the home. If there is no financial benefit I just assume keep things simple; one less account to worry about.

If I work all the numbers out, I am about $5,500 short. My plan is to pay off both balance transfers, and put a full 20% down payment so I only need a 80% mortgage. I will then apply for a new 0% balance transfer offer as soon as I close to hopefully cover the ~$5,500 or so that I will need. However, I will need about $5,500 for about 30 days to get through closing and time to apply for the balance transfer.

I have a couple different options I am floating around:
-Try and borrow the $5,500 from my parents
-Pull $5,500 from the equity line on my 1st house
-Borrow $5,500 from my girlfriend's savings account (I can't believe she offered)
-I could always sell some IBM stock to cover the gap

I am leaning towards pulling the $5,500 from my equity line on the 1st house. Then if I do get another 0% balance transfer I can treat it as though I am paying off the equity line with a cheaper financing option. Even if I didn't get another 0% balance transfer I would be still planning to pay off the equity line within the next 12 months.

9 Comments:

  • It's funny you should post this, I am closing on a condo on Friday and am trying to make sure I am liquid enough to cover everything. My problem is that I am returning to school and have a 529 plan, but I can't use that money for housing until August. It's a good thing you are figuring this out now instead of a when you are walking to the closing.

    By Anonymous Pistol Pete, at 9:06 AM  

  • Oh man, that sucks. But I always felt that you were playing with fire with all those balance transfers. It's fine to use them for extra cash, but now it seems like you have come to rely on them for cashflow. And they have to hurt your credit score, which you need now more than ever to buy the house. Too risky for me!

    I would cashout some stocks from your brokerage. Do you have any that you are showing gains so that you can sell without taking a loss?

    Good luck. I'll be interested to see how you pull this off.

    By Anonymous Anonymous, at 2:05 PM  

  • Perhaps you could get a piggyback loan for the $5500 and pay it off with a balance transfer. You should be able to secure one before your first mortgage payment is due.

    By Anonymous Scott, at 3:00 PM  

  • I wouldn't sell IBM stock now. It's P/E ratio is quite low and it's cheap at the moment. Most analysts think it will be over $90 within twelve months (a 12% increase). Today it closed at $79.78.

    How about a brief 401k loan? (I'm an IBMer, too, BTW). The current rate for a loan from the IBM 401k is 9% plus a one-time $50 fee. Of course, the interest paid on a 401k loan goes right back into your 401k balance. Also, a 401k loan won't show up on any credit reports. You will get a check from the 401k loan within a week, normally.

    I wouldn't worry about the opportunity cost of borrowing just $5500 against the 401k, especially if you pay it off quickly.

    By Anonymous Anonymous, at 6:16 PM  

  • go on prosper.com....

    By Blogger pyroracing85, at 7:06 PM  

  • I bought a car last year and didn't want an autoloan for the full amount. So I got a quick "signature loan" for the remainder and sold some of my IBM stock. Took about 2-3 weeks to get the check and I paid about $30 in interest for the privilege. I'd think for 5k you could get away w/ something similar even if you didn't sell the stock. (especially since you don't pay the 1st month's mortgage after a purchase).

    I'd lean away from opening a new loan because you'd pay more in fees then you'd save.

    Another thought would be "sellers concession". It was mentioned when I bought my home but I didn't know enough about it to ask more, or to get it. But my understanding is that it's a higher mortgage above and beyond the price of the house. So you could walk away from the closing with "cash back". My friend used it when he closed on his house.

    By Blogger Tatlow, at 10:53 PM  

  • $2M,

    You're in a pickle, but I think you can get out of it pretty easily. Actually you have all the resources you need.

    My first thought, is go with a short term loan from your parents -- if it won't be used against you in the future (I don't know your family dynamics). Insist on paying them a modest rate of interest akin to an internet money market account. It will avoid any fairness accusations from siblings, etc.... Make sure you pay it off quickly, within 2-4 months.

    The key focus here is that you need short term cash until you can roll over your two zero balance credit cards. I want to join anonymous in my skepticism about this method - in general the cash terms are too capricious.

    Having read your blog for a long time, I'm certain you haven't been using the credit card cash for cashflow expenses (as anonymous 1 asserts), but if that cash isn't liquid now, you were going to use it for capital expenses, which really is a violation of the liquidity principal of credit card interest rate arbitrage; i.e. have cash available to pay down the credit card instantly.

    Also sign a promisory note with them collateralizing the loan with some asset, say your ibm stock). If anything happens to you while travelling, etc..., they will be protected.

    Here is why the bank of mom and dad makes the most sense:

    1. your mortgage contract is very likely to forbid you from opening any new lines of credit - read carefully, but most do this.
    2. it won't show up on your credit report, which may be an issue when applying for new 0% rollovers -- I recommend you don't and get out of that business, but this is more on principal, than facts. Other than the current crisis, you're managing it well.
    3. mom and dad get a great rate of return, rather than a third party. In this case, they're giving the gift of love and you're giving the gift of money (:->)
    4. mom and dad will be more flexible with a balloon repayment schedule than most credit grantors. Specifically, you're going to have a boatload of expenses related to moving into the new house - even if you move yourself. You could make small payments for months 1-3, then a baloon at month 4. Keep maximum liquidity until your move is finalized and move expenses complete.
    5. mailing problems, internet connections, lost telephone messages, exhaustion, all tend to complicate moves. Bank of mom and dad keep it simple.

    In terms of your mortgage debt strategy, I really wish you'd reconsider it.

    I usually put down the minimum for a decent rate - in my case 5% and get a piggy back loan for the other 15%. This keeps me liquid and would keep you liquid enough to pay off your credit cards and probably have some extra cash for emergencies.

    I prefer the piggy back be a heloc than a fixed loan, but that's usually a judgement call based on interest rate differences.

    If you get the piggy back through the same institution you're gettting your primary (it's funny but they'll do it), the closing expenses will be minimal.

    In general a piggy backthrough any party should have much lower closing costs than a primary mortgage - probably under $600.

    Here are a few reasons to have a piggyback:

    1. You'll have quite a bit extra cash that can be invested in an on-line MM, Treasuries, Tips or CDs (breakable in emergencies) to minimize the cash flow impact of the extra 15% debt (maybe 2-3% interest difference).
    2. Alternatively, you can use that money for higher risk investments, such as another rental (you'll have 15% of the next property's purchase price), higher interest loans through prosper.com - I wouldn't put all 15% there, the market, etc....
    3. Do you need emergency cash?
    4. How will you pay for move related expenses?
    5. I hate to say this, because I think paying for new home decorations should not be a capital expense, but in reality, it usually is: do you have money set aside for furnishing and decorating your new home?
    6. You can always pay the HELOC down right away - or after you rollover your 0% interest loans, but still enjoy the benefit of the HELOC being available.
    7. You can pay the HELOC down on an accelerated schedule each month. And think of it as a modified savings plan.

    question: what will the interest expense be if you don't roll over your two 0% credit cards for 2 months? Maybe you should keep things the way they are a bit the bullet with the cards?

    If the interest charged to you will only be $200, it's the cheapest option of all.

    Have a wonderful day,
    makingourway

    By Blogger makingourway, at 3:21 AM  

  • Makingourway,

    I see my thinking as the same as yours - the only difference rather than getting a NEW piggyback loan, I am just drawing on the equity line from my 1st house (which is sitting paid off at the moment). Does that make sense?

    For instance let me lay this out a bit differently - I would really be doing 3 money shuffles here:

    1) Mentally, I am really putting 5% down and get a 15% HELOC.

    2) However, to save on costs associated with the loan, I am going to just use my dormit HELOC on my 1st house which has a good rate to cover the 15%. Makes sense right?

    3) However, I still have more cash lying around in my online savings accounts (HSBC, Emigrant). I would come out slightly ahead if I paid down the HELOC with this money. If I need cash I can always pull this money back out of the HELOC.

    In the end this leaves me with a balance of about $5,500 on my HELOC which I can a) pull more out of I need cash or continue to pay down at an accelerated rate with monthly savings.

    By Blogger 2million, at 9:58 AM  

  • Could you temporarily put the $5550 you need a on another CC and then decide how to pay it off in the month + you have before the amount comes do? At the very worst you would end up paying the interest on it and then you'd have another month to decide what you wanted to do.

    I guess next time in the future you will be staggering your 0% so that this does not happen.

    I would not borrow any money from 401K/ROTH or anything like that. Selling a stock is not a bad idea, especially in this type of market. The cost is minimal assuming a stock trade and then a later buyback, and if you are lucky the price will be lower and you will end up buying back the stock at a lower cost.

    I don't like borrowing money from family and and I don't like getting multiple loans, HELOC etc, which end up costing you due to the higher interest rate along with your standard 80% mortgage.

    What I would do is find out when they pull your credit last and then apply for a 0% balance credit card. I don't think there would be anything in the contract forbidding you from applying for any additional credit. I think that would be a first, what are they going to do....?

    You have a lot of options, and you should see which one is cheaper for you. If say you sell your IBM stock and it goes up $5 how much have you potentially lost? If it goes down $5 how much have you potentially gained? If it doesn't move you've lost a few bucks.

    Either way you have a lot of options, and some others I would never consider.

    Good Luck,
    Ray

    By Blogger Ray, at 3:59 PM  

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