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Refinance w/ cash out to pay off debt and purchase income property

5 posts by 3 users

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Josh Hesketh

Moorpark, California

Nov 07 '12, 06:58 AM


I am new to real estate investing but eager to learn. I am in the process of refinancing my current 30 yr mortgage to reduce my monthly payment. We determined we will save almost 200 dollars per month but will extend the current 27 year loan back to 30 years and add 70k to the balance Throughout the process. Recently we have become more interested in pulling cash out (70k) which would pay off our cc debts,2 car payments, and provide 45K to put down on our rental property..We have 50% equity in our occupied house. My concern is... Would it be worth it to pay for the 3% auto loans and 0% balance transferred cc's to free up cash for this new home?



Josh Hesketh

Moorpark, California

Nov 07 '12, 06:59 AM


The new interest rate on the refi is 3.5% over 30 years



Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Nov 07 '12, 07:07 AM
1 vote


Is it worth converting 5 +/- year car loans into 30 year loans? Uh, no. Same for credit cards. You're falling into the trap of using your house as an ATM. Lots of folks did that during the bubble. Now they're underwater and hurting. The real danger here is now that you have no car loan you start thinking you'll trade that free and clear car for a new one. Or that you'll start charging some more stuff on those zero-balance credit cards. I strongly recommend Dave Ramsey's "Total Money Makeover" to give you a different perspective on this choice. I don't agree with everything he says, but its an enlightening read if you're even thinking of doing what you propose.

Is it worth taking cash from your primary residence and using that to invest in rentals? That's a much, much tougher question. IMHO, this is not a good idea. You're putting your residence at risk to start investing. Better, IMHO, to get your financial house in order so you can start accumulating cash to use for investments. That may take time, but you have much less risk.

IMHO, a residence is just an expensive doodad like a boat or car. You don't want to be mortgaged on an expensive doodad. You want to own those outright. So, a residence should be something you own free and clear. If its free and clear, you can never be kicked out if you lose your job or suffer some major financial setback. If its mortgaged to the hilt, this is a real possibility, as many folks have discovered.

Others consider this as having a lot of "trapped equity". My response would be not to buy such expensive doodads. Live in a cheaper house. Drive a cheaper car. But be that as it may, you may want to read their opinions. There was a long discussion about this a few months back:
http://www.biggerpockets.com/forums/48/topics/74978-to-pay-or-not-to-pay-off-your-primary-residence



Jon Holdman, Flying Phoenix LLC


Keith Weinhold

Real Estate Investor from Anchorage, Alaska

Nov 07 '12, 03:59 PM


Of course you should take the cash out. Borrow against a property with a 3.5% rate to re-invest it for an ROI of 10, 20, or 40%.

I would only pay off the 0% credit cards and 3% car loan if that helps with your ratios or FICO score in qualifying for the new cash out refinance loan.

To be "afraid" to use "good debt" - like Suze Orman or Dave Ramsey are - would come at a significant opportunity cost for you and your family.

When rates are this low, I cannot understand why paying off a home is a priority for anyone. To have funds invested in a side account where one could pay off their home if they wanted to (but why would they?) is more desirable. This way, your money is both liquid and has a rate of return - home equity fails both of these tests.

Do you want to live below your means? Or make informed choices to expand your means?



Josh Hesketh

Moorpark, California

Nov 09 '12, 09:13 AM


I need some advice...
We are expecting a baby in february 2013 and we both work full time careers. My wife has the idea to pay off debts ($26000) so we will have more money available to put in savings each month and to pay for daycare if needed . I think that sounds great, but rolling 5 years worth of auto payments and some cc debt in to a 30 year mortgage doesn't make the most sense to me.... Recently we started the process of doing a refinance to get a better rate and save almost $200 per month. The loan is going from 4.75% @27 years to 3.25% back to 30 yrs. We have approximately 26,000 in debts which includes 2 auto loans at 3% each with 5 years left, and $4500 in credit card debt. Currently we have approximately $50,000 equity in the house. If we took out the money to pay the debts we would save $530 from our debts and $200 from reducing our rate totaling $730 more in our savings each month. If we take out just enough to reduce rate our payment would be $1231 and we would keep our debts at $530 per month or $6360 per year. If we take out an additional $26000 our payment would be $1377 and our only debt would be our mortgage. Any advice?



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