I purchased a new construction Duplex about a year ago (currently house hacking) at $359K and the value has gone up to $500K in the neighborhood. I was thinking about a possible Cash out refinance (not for the full $500k, but I'd like to get some of the equity out) and then using the cash for a down payment an another property. What are the pros and cons of doing so? Is there anything else I should take into consideration before making a decision?
Salinas, CA · Member since 2020 · 51 posts · 34 votes
4y
Congrats on the equity! Don't overleverage yourself with a cashout refi. Make sure your numbers still work with the new loan. Your mortgage rate will most likely be more since rates have gone up recently. If it makes sense, refinance and get another door out of it!
Salinas, CA · Member since 2020 · 51 posts · 34 votes
4y
Congrats on the equity! Don't overleverage yourself with a cashout refi. Make sure your numbers still work with the new loan. Your mortgage rate will most likely be more since rates have gone up recently. If it makes sense, refinance and get another door out of it!
Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
4y
The biggest con I'd say is if your payment on the current place goes up...but if you can absorb that or getter a greater return enough to offset that increase with a new purchase, then I'd say its a slam dunk. Other things to consider, what will the new purchase do to your DTI once its all said and done...Does that end result align with your investment goals? Are you able to refinance the current duplex with another owner occupied loan? That would really get you the best terms I think. But as long as the potential new returns you'd get would counteract any increase in payment Its a great idea! Let us know how it goes!
Real Estate Agent · Atlanta, GA · Member since 2020 · 1k+ posts · 1k+ votes
4y
@Brittany Shaver this strategy is talked about and used all the time by like-minded investors. Most investors who have used this strategy would advise that you run your number religiously and perform your due diligence. A couple of things to note, you have to have at least 20% of the equity in a property to utilize a cash-out refinance. Furthermore, the majority of lenders will only allow you to pull out up to 80% LTV of the home, therefore, you won't have to worry about 100% LTV cash-out simply because a lender would not allow it. Hope this makes sense and helps!
Lender · Winlock, WA · Member since 2020 · 124 posts · 82 votes
4y
If you are going to pull out the equity for investment purposes I would advise looking at a HELOC as well as a Cash out.
The Cash out will have a higher rate and payment than your current mortgage but you get a lump sum of Cash. The Max Cash out on a Owner Occupied Fannie 2 unit is 75% LTV. This can be very useful for down payments or quick projects.
A better strategy I think is getting a HELOC which can go up to 90% LTV, rates are adjustable but you will only be paying on what you actually use, leaving your mortgage at your current rate. Once you have placed your down payment on the next property you can begin paying off the HELOC so that it can be used again and again for a Owner Occupied HELOC the next 10 years.
Depending on what you are wanting either option is good but in my opinion if you wanting to use the cash for Investing the HELOC is the better route.
@Torrell Palmason Thanks so much for the insight! How would I go about getting a HELOC? Is it a similar process to a refinance? Would I need to contact my lender or would it be through another party?
Lender · Winlock, WA · Member since 2020 · 124 posts · 82 votes
4y
An Owner Occupied HELOC you should be able to get anywhere if you have a trusted lender you can go through them and they will either have the HELOC or know a Local Bank that you can go through. Personally I recommend a Credit Union as they are generally much more competitive.
The process is pretty quick and simple. Apply for the HELOC through your preferred Lender, I'd recommend looking for one that won't require an appraisal unless you don't like the value they come up with for your home. After that you'' submit a couple Income docs and clear up any conditions that come up. If there is no appraisal that will be the whole process besides signing, Mine has taken 2 weeks and I'm all done.