Newbie: Should I REFI OR NOT?

Question

Hello,

I have a property I purchased for $97,500, with an original appraisal of $100,000. My mortgage payment including (Principal, Taxes and Insurance) is $477. I paid a 20% down payment bringing the mortgage to $77K, I've also completed a rehab putting in an additional $20k into the property. All in cash between down payment and rehab brings me to $42,000. My question is should I refinance at a 75%LTV, my estimated ARV is between $125K - $140k. If I complete the REFI I potentially only get $13K with a Mortgage payment increase to $508 Or hold the equity in the property?

Jody Sperling · Answer

Find a bank in Texas that will give you a First Lien HELOC on the property. The fees to get a HELOC will be about a fifth of what you'd pay if you refinanced. You may pay a slightly higher percent interest, BUT you'll pay fewer dollars in interest because every dollar you pay toward principal lowers the amount of money you pay interest on, whereas a mortgage is a set cost and no matter what you do, you can't escape the monthly set cost.

Once you have the First Lien HELOC, start using it as your checking and savings account. Instead of setting aside x number of dollars, put every dollar into the HELOC. If you end up needing those dollars, you can always pull them back out of the line of credit, but as long as you don't need those dollars, they're going to pay down your principal and interest costs.

People use this strategy to pay off houses in as little as three years, and it really works, but if you simply want to use it to build up equity for an investment purchase—which is how I use mine—you can withdraw a huge chunk when a good property comes along and use the equity in your home to buy an investment. Then, you just continue the process of using the HELOC like savings and checking etc...

Most primary First Lien HELOCs will give you up to 90% LTV on the appraised value of the house, too, so you'd have access to more cash. The only warning here is that you can't live above your means and make this strategy work for you. Best of luck!