Refi mortgage with home equity loan

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Refi mortgage with home equity loan

Duane K.
New Market, MD · Member since 2013 · 4 posts · 0 votes

Hello all, I'm still fairly new to real estate investing and also new to biggerpockets (this is my first post). Anyhow, this is maybe slightly off topic as it's dealing with my personal home rather then a rental property, although I do plan to convert this home to a rental within a few months or year at most.

Background is I owe about $218k on the property, it's zillow estimate is about $212k, but i had a Realtor take a look and they recommend if i wanted to try to sell it (i was looking at options) to start at $240k. I have an FHA loan and am paying $200 a month in MIP for the next 3.5 years, my interest rate is 4%.

So, my bank got in touch with me about an option to pay off the mortgage using a home equity loan from them. Only closing costs are county fees etc, no appraisal fees or anything so less then $500 total. Needs to be 85% LTV but seems like they are willing to use the $240k estimate to meet that criteria. APR would be 4.09%, no PMI thus saving me $200 a month for the next 4 years. I can convert it to a rental, i just have to living in it when the loan is originated. If i pay off the loan within 36 months i owe them $350.00.

I've never heard of this option but it sounds like a great opportunity especially since they seem to be evaluating my property value on the high side to make this work for me, but am I missing anything? Any reason i should give doing this a second thought?

Thanks

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y

So, they will loan you $204K based on the $240K value, right? You would have to come up with $14K for the shortage plus $500 in costs.

What are the terms on the new loan? Home equity loans are usually only five or 10 year terms, not 30. If they're offering you a 30 year term, this is really just a refi, and a cash in refi at that.

As far as it being a rental, what would be the new payment and what's the rent? Maybe it works, maybe not. Would you self manager or use a PM?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    So, they will loan you $204K based on the $240K value, right? You would have to come up with $14K for the shortage plus $500 in costs.

    What are the terms on the new loan? Home equity loans are usually only five or 10 year terms, not 30. If they're offering you a 30 year term, this is really just a refi, and a cash in refi at that.

    As far as it being a rental, what would be the new payment and what's the rent? Maybe it works, maybe not. Would you self manager or use a PM?

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  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    13y

    I don't think any bank would replace a mortgage with a home equity line of credit. It seems like you're confused about what they're offering. I believe they're offering you a HELOC up to 85% LTV.

    If your house is worth 100,000 and you owe 50,000 they would offer you a line of credit for the difference of 85% LTV and your existing mortgage which would be 85K - 50K = 35K.

    There may not be an appraisal fee, but anytime a bank offers money on a home there is an appraisal and the appraised value is what is used.

    You cannot trust Zillow for coming up with this number - you're lucky if the "Zestimate" is within 25% of your home's actual value. You also cannot use what a realtor says he/she would list it for. It is based off of the 3 closest comparable properties that have sold in the last 12 months.

    Even if the 240K estimate from the realtor were correct, you cannot get any equity out of the home, nor can you eliminate your PMI at this point.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y

    Michael cut to the chase. You currently owe $218k. The home would have to appraise for more than $256k to simply payoff the current mortgage. Then the idea of why get a HELOC if you can't get any cash out of the line of credit?

    You also might want to double check the terms of that HELOC. It is most likely and ARM. While you will not see an instant rate hike, one is coming sure enough. You wold not want to have an ARM and ride interest rates up, increasing your payments until you pay down enough principal to refinance, again, and fix the rate.

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  • Duane K.
    OP
    New Market, MD · Member since 2013 · 4 posts · 0 votes
    13y
    Originally posted by Jon Holdman:
    So, they will loan you $204K based on the $240K value, right? You would have to come up with $14K for the shortage plus $500 in costs.

    You know when I was talking to them about this the way they responded I thought the math worked out that I could get $218k based on 85% LTV, that'll teach me to check the math closer! But they did think it was worth at least trying to see if i get approved when i brought that up with them today. So not sure if it'll end up that maybe they'll be generous with the appraisal, if i'll have to make up the difference like you mentioned if I want to pursue it, or if I simply won't qualify.

    This would be 30 year fixed. The new payment per month for me would be a little over $1400 per month if i include set asides for taxes and insurance in there. I could rent it for about $1550/month. It's not a property I would buy as a rental, I'm only considering turning it into a rental because i already own it, thus no closing costs or down payments to get it. And if i sold it i might have to pay a bit into it. I'll likely move about 2 hours away so though I'd prefer to have a PM I could self-manage to make the numbers work better if necessary. Undecided I guess on that one.

    So this is 30 year fixed, and though it's a home equity loan it would replace my current mortgage. Additional info here.

    I guess the basis of my question is, since I've never heard of a home equity home working quite like this (replacing a mortgage), are there any caveats i'm not seeing to using a home equity loan to pay off and then replace a mortgage? Again, biggest goal would be to eliminate my MIP.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    If you turn this into a rental, are you able to make up the shortage when needed? Because with $1400 PITI and $1550 a month in rent, this is cash flow negative. Unless you have some strong reason to keep it, I'd consider selling. If you really can get $240, your shortage would be pretty small.

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