First Flip Funding Strategy

[Laurie Bachorek]

We are getting our ducks in a row for our first Flip and looking for your comments/advice on our strategy. We have about $160k equity 5 years in on our primary residence. Principal balance is $208k at 3.625% (includes PMI). I have a deal on the table to refinance the mortgage and cash out $35,000 for a down payment and rehab costs on the flip. The refi closing costs are $3500 (financed) and would include another consumer loan we would payoff to get our debt to income where it needs to be - $14,000 (also financed). Also will include $35,000 cash out (also financed) to obtain a new mortgage on the flip and any rehab costs. New rate would be 4.625% and no PMI. This deal will put our principal balance at $264k and leave us with a remaining $100k in equity and increase our monthly payment by $80/month - no PMI. I’m thinking this is the cheapest way to fund our seed money. We want to find a property about $100k / no more than $15k rehab cost / resell for $150k. DFW market.. Thanks for any advice or comments you may have on this funding strategy. Cheers!

[Larry Turowski]

@Laurie Bachorek NO! Get a HELOC (home equity line of credit). There will likely be no closing costs, they run to about 90% of market value, so you could get one for about $120K, take out only as much as you need, pay it off when you don't need it, borrow again on your next flip, and keep your low rate on your original mortgage.

You'll be able to buy your flip property and rehab it with the HELOC and you won't incur closing costs for financing that property either.

[Laurie Bachorek]

HELOC's have higher interest rates, though, right? Honestly, that's a big question we have...what exactly is the difference between a HELOC and a Home Equity Loan? From my limited understanding, I'm afraid of having that much open revolving credit. A fixed loan amount seems Moreno palatable but what am I missing? Thank you very much for your insight. Ought to mention, I'm in Texas and until recently, banks couldn't do HELOCs here because of the potential for homeowners to lose their homes. I still have a healthy fear of that - but admittedly, don't know all the particulars.

[Daniel Helland]

You're only going to be paying interest on the HELOC when it's drawn down. On a term loan, on the other hand, you'll be paying interest on the entire balance. And if you pay it down and need it again, you're looking at a whole new set of closing costs.

Depending on the loan type, you may also be able to get the PMI removed from your current loan. OO residential is outside my scope but check with your current bank.

[Jim Cummings]

@ Laurie Bachorek. Home Equity Loan is similar to a regular Loan, while HELOC is a Line Of Credit based on the equity in your home. To my knowledge, under current Texas Home Equity / HELOC laws you can only borrow 50% of your equity balance.

There is a Proposition 2 - Constitutional Amendment being voted on November 6 election. (You are voting I presume) that would change this to allow up to 80% of equity. 

I would suggest using a HELOC vice a Home Equity Loan.

[Laurie Bachorek]

That makes a lot of sense. I will look into a HELOC before we pull the trigger on this deal. Even if we can only access 50%, that would cover us. Our primary lender doesn’t offer HELOCs, any lender recommendations in Texas? Good point to avoid multiple refi’s with closing costs.

[Jim Cummings]

Laurie

Suggest you look at Regional Banks, possibly Credit Unions. I would think most of them would offer a HELOC product.