Should We Take Out a Loan For a Land Lot?

Jim and his wife found a property that they want to build their dream house on, but they are putting all their money on paying off the mortgage. Is it all right to take out a small lot loan for $69,000?

QUESTION: Jim in Wisconsin and his wife are on Baby Step 6 with two years left. They found a property that they want to build their dream house on, but they are putting all their money on paying off the mortgage. They earn $135,000 a year with a $160,000 home, on which they owe $70,000. Is it all right to take out a small lot loan for $69,000? Dave has a better idea.

ANSWER: Why don’t you just sell your house, buy the lot and build a house on it? It’s going to be below 25% of your take-home pay anyway on a 15-year fixed loan. Sell your house, buy the lot, get a loan, and then pay that house off.

Meanwhile you can rent something inexpensively over the year it takes to do this, but use the money out of your house to do this. With your plan, you’ll end up with a paid-for rental property and a mortgage on your home. It’s going to take you five years.

Here’s the problem: You are buying the lot before you’re ready. I would probably just sell your house now and rent. Then I’d buy the lot and build. Do it now and then when you pay off something, you’ll pay off the new house. I would do that instead of taking out two mortgages at the same time and waiting five years to do all this. The math ends up being the same.