Does a cash out refinance make sense for me?

Question

My wife and I are looking to move to a bigger house but are dependent on the sale of our current home to have enough for the down payment. We are wondering if getting the down payment from a cash out refi and then renting our current house would make sense.

Here are the details:- Need about $35k for a down payment- Current home worth $275k, we owe $220k on the mortgage, bought it for $240k- Estimates for monthly rent for our home are $1800-$2000- Current mortgage payment + HOA + utilities = $1950

Happy to give more details if needed!

Chris Mackinlay · Answer

@Jacob Tate

Probably not. If you rent it for $2000/month after a refinance, it would be like buying the house for investment purposes at $275k.

Violates the 1% rule of thumb by a lot.

Sure you could cover the mortgage and taxes, but you'd be losing money with every repair and vacancy.

Probably a better option to sell it. Also, there are costs in refinancing.

Steven Foster Wilson · Answer

@Jacob Tate theres a lot go good wisdom here. Listen to the 1% rule.

However if you were absolutely convinced you needed to leverage your home in order to buy this new house, think about this.

Appraisal this is the deal or no deal for HELOCs and Refinancing. If your off your deal could not be a deal anymore, and for SFHs it all up in the air

Refinancing  it will most likely only be for 70% LTV (Loan to value ratio). Your home is worth 275 *.75 = 206,250 is how much you would have to cash out... That would leave you in the hole. Even if you found an 80% LTV product, you would not have enough equity to cash out much.

HELOC I know some lenders that will go up to 90%LTV, you could find some local lenders that would probably do the same. If that were the case you'd be able to get 275*.9=247,000, you'd still only be able to get 27,000 cash out, but then your paying 5% interest on that money.

Seems like you need more equity or you need to raise the value of your house.

Jaron Walling · Answer

Hey Jacob! Unfortunately neither one of these approaches are going to work. Because you owe $220k on the house (about 20% equity) very few lenders will approve a HELOC. Typically you need >30% and have to meet a few other qualifications.

Secondly, as a rental this property it will negatively cash flow. This means every month you'll be losing money just to hold on to it. This is not ideal for an investment property. If you're hit with an unexpected repair you'll be paying out of pocket. You can speculate on appreciation but don't plan on it saving you.

I would try to find another way to raise the money or sell the property in the spring.

Tyler Weaver · Answer

Does rent of similar houses in your area include utilities or would they be paid by the tenant?  It seems too thin of a margin to be a good rental property. A banker is going to be looking a PITI (Principle , interest, taxes, insurance (+HOA)) vs income.  There should be a very good margin here because you will also have to make repairs and account for vacancy from the margin between PITI and rent.

Then the matter comes to finding a bank that will recognize rental income as your own income for purchase of a new property.

If you are interested in learning more about rental properties, Brandon Turner's book The Book on Rental Property Investing is a great read.

Does a cash out refinance make sense for me?

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