What would you do if you were a first time buyer?
New to Real Estate · Kansas City · Member since 2024 · 2 posts · 1 vote
What would you do if you were a first time buyer?
Most Popular Reply
Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votesAna,
Based on experience and this market me personally I would avoid a HELOC for a few reasons. One a Heloc rate is much higher than a typical cash out refinance rate even if your first mortgage rate is low more than likely 3-4%. A Cash out refinance offers a 30 year versus a Heloc which is usually 10 to 15 years making the Heloc payment higher. Not only that but you are going to carry a Heloc in a 2nd lien position and you will not be able to pull out more cash unless you do a cash out refinance to pay off the previous Heloc and take out more cash.
85% of the home owners who take out a Heloc refinance in 3-5 years so it makes more sense to simply do a COR and avoid the future closing costs. A Heloc is also a debt burden because its a credit line not a mortgage so it gets looked at as a debt and not an "Asset". When you do a cash out refinance its cash in hand (liquid reserve) so it can be used as an asset or for PITI reserves on the next purchase.
The other downfall is if your credit score should drop for any reason which can happen even my accident or mistake the lender will close or reduce the Heloc credit limit. Fico Scores can drop fast when a person starts to open and take out multiple LOC's and mortgages which is considered "Excessive tradelines" based on your DTI.
Helocs are great for quick renovations or repairs and should be used and paid off or down quickly. You do not want to use it for a down payment where you will end up having to float it for 3-5 years before you can refinance the next home to pull out enough cash out to pay it off. You can end up locking up access to equity and cause your buying power to become frozen due to DTI or an adjustable rate.
3 Replies
- 2yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Ana,
Based on experience and this market me personally I would avoid a HELOC for a few reasons. One a Heloc rate is much higher than a typical cash out refinance rate even if your first mortgage rate is low more than likely 3-4%. A Cash out refinance offers a 30 year versus a Heloc which is usually 10 to 15 years making the Heloc payment higher. Not only that but you are going to carry a Heloc in a 2nd lien position and you will not be able to pull out more cash unless you do a cash out refinance to pay off the previous Heloc and take out more cash.
85% of the home owners who take out a Heloc refinance in 3-5 years so it makes more sense to simply do a COR and avoid the future closing costs. A Heloc is also a debt burden because its a credit line not a mortgage so it gets looked at as a debt and not an "Asset". When you do a cash out refinance its cash in hand (liquid reserve) so it can be used as an asset or for PITI reserves on the next purchase.
The other downfall is if your credit score should drop for any reason which can happen even my accident or mistake the lender will close or reduce the Heloc credit limit. Fico Scores can drop fast when a person starts to open and take out multiple LOC's and mortgages which is considered "Excessive tradelines" based on your DTI.
Helocs are great for quick renovations or repairs and should be used and paid off or down quickly. You do not want to use it for a down payment where you will end up having to float it for 3-5 years before you can refinance the next home to pull out enough cash out to pay it off. You can end up locking up access to equity and cause your buying power to become frozen due to DTI or an adjustable rate.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2y
Quote from @Ana Lidia Standing:
Your equity is not a savings account from which you can withdraw for free. If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.
EXAMPLE
You cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).Key Numbers
- Home Equity Loan Interest Rate: 6%
- Mortgage Interest Rate: 7%
- Rental Income: $3,000 per month
- Expenses (management, taxes, insurance, maintenance): $800 per month
Income and Expenses
- Monthly Rental Income: $3,000
- Monthly Expenses: $800
- Monthly Mortgage Payment: $2,000
Explanation
- The investor earns $3,000 in rent each month.
- They pay $2,000 on the investment property mortgage and $800 on other expenses.
- This leaves $200 profit each month or $2,400 per year.
- However, you have to pay $6,000 interest on the equity borrowed.
- This leaves you with an annual loss of $3,600.
This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.
The DIY Landlord Book4.7248 Reviews - Flipper/Rehabber · Chattanooga, TN · Member since 2023 · 12 posts · 21 votes2y
Great starting position!
Don't overthink it. Grab a house off the MLS that needs some updating. Mostly cosmetic would be preferred.
This way you can gain some experience and avoid any major issues that might come from a bigger rehab.
Who cares if you have to leave a little in the deal instead a 100% BRRR. The main thing is to get the appreciation clock ticking on a property.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.