Advice: Cash out refi

44 Replies

Hi everyone. So my husband and I had been aggressively paying off our mortgage with the goal of saving up for a rental property after that, but with all of the information here and after talking with some investors at our first REI meeting last week, we thought it was time to stop talking about it and just.do.it.

So... we are working with a friend on doing a cash-out refi but the new payment is a little hard to swallow since it's $300 more/month and we've been so focused on getting out of debt... AND will eat into future cash flow when we rent out this property. 

I need to know whether we should do this or not! 

Current details:

Payment is $1,270

Interest rate 4%

Loan balance $108,000

Cash-out refi:

Loan Amount: $210,400

Conv., 30 Year, Fixed

Int. Rate: 5% (Cash-out Guidelines & No Points)

Monthly Payment (P&I, Tax, & Ins.): $1,580/mo

Cash Back: $95K

In our market, we were thinking $40,000 as a down payment on property #1, $30,000 on rehab, then use the $20,000 as a head start for property number two. 

Should we do the cash-out refi?? We actually intended on eventually renting out our current house, so a higher payment would mean lower cash flow in the future from that perspective as well... Thoughts?

For what it's worth, we could have $60k - $70k saved by the end of the year to buy something, and keep our current mortgage as-is...

@Jessica Geisler When you are doing cash out to buy other properties you can't do calculations solely on current house positive or negative income. You have to see overall positive income from other properties which you are buying with this cash out money.

Perhaps I'm missing an important point. If you have sufficient equity, why don't you simply obtain a home equity line of credit? You can use the money when it's needed, without changing your existing note rate. Obviously, HELOC rates may rise, but why pay interest now if you don't need the money yet. Obviously, you know the exact details of your situation. I hope this helps.

Stephen

@Stephen Renehan well I'm ultimately looking for the best strategy to be honest! I will say that I'm pretty conservative, so a variable rate would make me nervous.. We wouldn't be paying off the heloc right away, we would be using the money to buy a rental property to hold long-term. We were planning on using the cash to buy a property as soon as we found one. In what instances does a heloc make more sense than a cash-out refi?

Let me use a personal example. I just purchased a property which I am rehabbing. I only pay interest on the money I use. I'm sure you're familiar with the BRRRR strategy. If not, just check out Biggerpockets.

Once I finish the rehab in a few months, then I will refinance into a long-term fixed rate mortgage. Interest rates shouldn't increase dramatically over a few months, but this is your call. Consider a HELOC a credit card secured by R/E. I may have a credit card with a $10M limit...but it doesn't cost me a dime until I use it.

I hope this helped.

Stephen

@Jessica G. As you step more and more into the world of real estate, you will realize that .... targeting to be debt-free, while at the same time build a large portfolio of real estate assets don't always go hand in hand. You need to learn to take on more debt, but make sure it is good debt. I used to only take on 15 year mortgages (even on my rentals), but then missed on lots of opportunities to acquire good assets, because I didn't have enough cash. 

If your goal is to acquire lots of real estate assets, wouldn't you want to do it as early as possible, while interest rates are still low, rather than later (at a higher entry point)? 

I think you should probably start looking at the bigger picture, let's say 4-5 years from now, rather than 1-2 years ... 

Good Luck !!!

How much are the closing costs for your loan? That would be an immediate hit to cash or equity in the home that should be considered. The additional monthly mortgage will also increase your debt to income ratio, which could also affect your ability to get a loan.

If you and your husband are on the same page with real estate investing, would it be possible to find a live in flip or house hack a duplex? Rent out the current house and possibly get some cash flow, combine that with the low down payment for the new house being your primary residence and I think it is at least something to consider.

So i did some math using trusty Excel comparing two 5 year plans - 1. Pay off house, save up and pay cash for 1 rental. Zero debt. 2. Buy 2 rental properties per year for the next 5 years, ending up with mortgages on all, including primary residence... 

And by year 3 our Net Worth is about even, but by year 5 our Net Worth is 30% higher in Plan 2 taking into account 2% appreciation and conservative debt pay down... Hm. I think that answers my question, I'm sure a lot of people could have told me that would be the case! 

Anyway I really appreciate everyone's responses!

@Callum Ross when we bought our current house that was actually the plan! But 3 years later we have two little boys and think that moving would just be too stressful and  would be pretty expensive as well. Plus I've decided the next house I live in is not going to require ANY WORK!!! Lol. 

@Jessica G. I would just stop paying down your current mortgage and save up the $60-70K by the end of the year. House shopping between Thanksgiving and Christmas is the best time because most people are in holiday mode so you can get a better deal than spring shopping.

Keep your mortgage and take out a HELOC. Don't worry so much about the variable rate. It is tied to prime and although it can / will move up, it won't happen super fast. The point of the HELOC is to use it to acquire and rehab. Then if you are holding the property, refinance it into a fixed mortgage and pay off the HELOC. You might carry a balance a few months at 5.5%, but all you have to pay in interest. The nice thing about a HELOC is you have ready access to cash if you need it, but pay nothing if you don't use it. If you refinance your house, that cash will cost you money from day one.

How is your property hunting going? I have read a few of your posts and just curious how it is going.

@Joe Splitrock Thank you for the input, we are looking at both options now! Ugh, it's a TOUGH market out there and it's even tougher when you work full-time! But I'm definitely still at it, I've talked to a couple of home owners, however with no luck. Either way, the fire has been lit and we are actively getting involved in the REI world and meeting other investors and are ready to just get in the game. I'm confident that once we do that, it will lead to other introductions, opportunities, etc. and we will just take each step as it comes!

What Joe said. Besides, can you even rent your current property out above PITI+expenses when/if you refi?

@Joe Splitrock @Victor S. Ok this is where I'm getting a little lost. "Then if you are holding the property, refinance it into a fixed mortgage and pay off the HELOC." If you wouldn't mind breaking it all the way down for me?

Find a house for $200,000

$40,000 down

$30,000 rehab

So I need $70,000 cash.

Use my HELOC. Now my payment is $375 ? Plus my regular mortgage payment. And I would need to be pre-approved for another mortgage already right? So have that mortgage in place. Increase the value to $250,000.

So now I have a HELOC of $70k and a mortgage of $160,000 on a house with $250k in value (the rental). Refinance to get the $70k back out. Pay off HELOC. Now I have my regular mortgage of $1270. And new mortgage of $175k on rental. And still have access to the HELOC.

Sorry just kind of thinking out loud and making up numbers. Is this how it works? What if I can't refinance or the appraisal doesn't give me $70k in equity? Can I just use that line of credit over and over to buy properties?

I would look into a Heloc as others have said. My husband and I just pulled out money from our Heloc and bought 2 rental properties out of state that are cash flowing very well! Good luck! So much info out there, so easy to get stuck sometimes!

@Joe Splitrock Are you able to refi your rentals with 30 year fixed rate loans? Our local banks will only give ARMS to investment property. 

@Jessica G. Our friends save and save and save to pay cash for their properties...they have not been able to grow. It's what they are comfortable with however, now they are looking back and wishing they would have acquired more faster. 

Not sure if you are accounting  for the magic of other people's money...one thought is, why use your personal after tax money to buy a property? Also, if the property is paid for, you will have a net increase personal income from the rent, with potentially higher taxes overall.  If you take a mortgage out, and let your tenant pay the mortgage, you have them paying for your asset and you can you use your after tax income for other savings, etc. Also, if there is a mortgage, your taxes are reduced with ability to deduct interest paid. Before you know it, there is equity in your rental through OPM and appreciation, and then you get to leverage that rental to buy more rentals!  Just a thought, always best to what feels most comfortable for you.  

@Tiffany Ralston "Before you know it, there is equity in your rental through OPM and appreciation, and then you get to leverage that rental to buy more rentals!" This is 100% the reason we decided to switch strategies. Also because if (when) we decide down the road that we are done with the acquisition phase we will be in a position to sell off some and pay off mortgages with the equity we will have built over the years and just live off the cash flow. This is something I just couldn't ignore! Thank you for the info about your friends, that is very helpful.

You have a great rate at 4%, with the Feds raising the rates it could some time before they are that low again. 

@Jessica G.   Isn't awesome when the "aha moment" happens? It's really fun to learn various strategies, and choose the ones that fit you best. Also, your strategies can change over time. The flexibility of wealth creation via real estate is unlike anything else. Welcome aboard!

@Jessica G. We have used HELOC, it's worked well for us, and we only use it to buy real estate. (You can use the money for anything, and this is when peeps can get in trouble)... We live below our means, and send extra to the principal to get it paid down quickly so we have more buying power. Just like a credit card.

I'd stay where you are and use your savings at EOY.

I've never sunk tons into a new rehab on a rental.  I'd buy 2 that don't need huge cash rehab injections right after purchase. Buy good enough and get 2.  Its a box people live in to pay you rent. Just stole that from the most recent podcast!

Oh and congrats on your awesome savings rate, Jessica.  That's fantastic!

@Jessica G. One thing to consider when choosing between HELOC and cash out re-fi is closing costs. General cost to establish a heloc is $250ish. It can be more if you choose to have an appraisal done your home to capture a bigger heloc. (appraisals in our area run $350-$450).

For example, your lender can establish a heloc based on price you paid (or assessed value) less the amount owed)  If you have an appraisal done, and your house has had significant appreciation, the lender will use the new market value less the amount owed)  That's when the magic really happens!  

The cash out re-fi typically has higher closing costs (and often requires an appraisal too). Double check with your lender on closing  costs.  As your relationship builds, they are happy to make things work out for you. 

keep your present rate of 4%

either save up the  cash needed  for the next  investment  or as others have said  -  consider using a Home equity line of credit to  access the  equity  needed .....this heloc max limit   will be dependent on  your property value and  the current balance on the 1st mtg  .,.....assuming you can get at least a 90K  heloc - you can then  use  whatever amount of advances  you need   for  * down payment on rental * rehabbing  etc

even though the heloc rate will be higher than the rate you can get on a cash out refinance - the outstanding balance that will be on the heloc  is realtively small  and thus  this rate  concern isn't that large

Originally posted by @Jessica G. :

@Joe Splitrock @Victor S. Ok this is where I'm getting a little lost. "Then if you are holding the property, refinance it into a fixed mortgage and pay off the HELOC." If you wouldn't mind breaking it all the way down for me?

Find a house for $200,000

$40,000 down

$30,000 rehab

So I need $70,000 cash.

Use my HELOC. Now my payment is $375 ? Plus my regular mortgage payment. And I would need to be pre-approved for another mortgage already right? So have that mortgage in place. Increase the value to $250,000.

So now I have a HELOC of $70k and a mortgage of $160,000 on a house with $250k in value (the rental). Refinance to get the $70k back out. Pay off HELOC. Now I have my regular mortgage of $1270. And new mortgage of $175k on rental. And still have access to the HELOC.

Sorry just kind of thinking out loud and making up numbers. Is this how it works? What if I can't refinance or the appraisal doesn't give me $70k in equity? Can I just use that line of credit over and over to buy properties?

That is pretty much how it would work. Another option is aggressively pay off the HELOC with your savings. Then no need to refinance after the rehab, but you have more equity trapped in the property value. It will give you more monthly cash flow on the property.

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