I'm a newbie, planning on buying my first SFR in the next 4 months. I'm working on the financing with my bank and I already have my eyes on a property.
Here are the financing options offered by my bank:
1. cash out refi. I have about 100k equity on my house and my bank is offering to refinance the house, apr 3.75% on 15 years or 4.75% on 30 years and give me 60k in cash. Now my mortgage is a 15 year at 3.5%. I read that cash out refi is only worth it if the interest offered is lower than the original one.
do you think I should accept this option, considering that i also have to pay the refi fees? I'm inclined to say Nay!!!
2. They also want to offer me a HELOC with a 100k limit. I dont know the other details yet. we'll talk about it tomorrow.
3. They plan on giving me an unsecured LOC with 80k limit.
4. Last and more importantly, they are offering up to 4 residential type mortgages at less than 4% interest rate for 30 years.
My request to the banker was very specific: I want financing options with almost 100% financing. This is what she offered. What do you think? How would you proceed if you were me.
I'd like to buy my first property before the end of the year and have 4 properties in thenext 12 months.
My plan is to use the cashout, HELOC and LOC as down payments for the conventional mortgages to buy my first 4 rentals and use none of my cash.
what do you think about this financing strategy? It it something you would do?
Sounds like you are well positioned and have a great pool of starting capital. You will have plenty to do down payments and repairs on several properties going forward. Always make sure to pay yourself back on the HELOC and LOC to avoid excessive interest (lost profit).
Thank you for your reply Scott! Would you do the cash out refinance even if the interest rate is higher than my current interest rate? My mortgage is currently at 3.5%, 15 years and they are offering 3.75% for 15 years or 4.75% for 30 years. I was thinking about going for a 30 year mortgage to lower my payment.
I think it might be worth it for you to do the cash out refi. But do it with a 30 year amortization, not your current 15. It might even lower your payment PLUS get you cash out (keyword: MIGHT)
The other option would be to keep your current mortgage in place and get a HELOC to tap into your extra equity. HELOCS are great - you don't pay until you use it, and they are typically low or no fees. You can pay it off and reuse it as many times as you want.
Thank you very much Kyle,
In fact, we ran the numbers and with the cash out refi, i would get about 60K plus my mortgage will go down $500 per month on a 30 year amortization.
But the reason why I'm undecided on the cash out is that they are willing to offer me 60K for the cash out, plus 100K for the heloc plus another 80K for the LOC, a total of 240K which is possibly more than I need. Or maybe I should just get all the cash that they are willing to give.
I was thinking about securing the HELOC and LOC first and then decide later but I wanted to hear your opinions to see if the deal offered on the cash out refi was good.
The biggest question: they are also offering me up to 4 mortgages at about 4.75% with a 30 year amortization to buy my rentals. I would use the cash out, LOC and heloc as down payment. Is that a good 100% leverage strategy? I would not use my own cash but I could weather a downturn with my own cash with no problem.
I would take the refi and set up both LOC's. The cash from the refi can get you two or three down payments.
I would NOT use the LOC's for down payments, because as you said you'd be 100% leveraged. You could use the LOCs to do a BRRRR or flip strategy though, since you are adding value you can sell or refinance, then pay off the LOCs and repeat. But I would. It recommend BRRRR for your first or second deal.
Thanks Kyle, I really appreciate your advices.
It is very nice to *have* these choices. Many people do not. I like the 4 residential mortgages from where I sit. I like long term rentals, and the occasional rehab.
You have to think about what strategy you plan to use, and line that up with the use of financing...such as the LOC for flipping or rehabbing vs. the 4 mortgages for long term rentals.
Thank you Kerry,
I want to do single family rentals and small multifamilies for the long term. Operate with a management company. Out of state.
I'm still unsure if I should cashing out part of the 150K equity that I have on my house and refinancing into a higher interest rate (current is 3.5% @15 years vs 4.75% @ 30 years with 500$ less in mortgage per month)
The alternative would be to spend my own cash as down payment, which I could. But I read several articles on this board about the power of leverage and I do have enough cash to weather a possible downturn.