I’m looking at buying a new house. I currently own a 3/2 with approx 185k in equity and 115k left on the loan. My plan is to take out a home equity loan for the down payment of 20% on a 520k house.
Current mortgage is 1100/mo and HE Loan payment would be ~900/mo
My plan is to rent our current house out as a LTR.
My question is, should I consider the HE loan amount as a loan service in the cash flow equation on the rental, or consider it just as an expense on my new home?
I’m looking at buying a new house. I currently own a 3/2 with approx 185k in equity and 115k left on the loan. My plan is to take out a home equity loan for the down payment of 20% on a 520k house.
Current mortgage is 1100/mo and HE Loan payment would be ~900/mo
My plan is to rent our current house out as a LTR.
My question is, should I consider the HE loan amount as a loan service in the cash flow equation on the rental, or consider it just as an expense on my new home?
Sam, you can buy your next house as a primary residence using a conventional loan and only need to put 5% down. But you are smart to take out a second position loan on the house you are in now before you turn it into a rental, just make sure your DTI will qualify. You want to count both loans on that house as loans on that house, but it's probably better to do a second rather than refi the 1st since the rate is probably super low on the 1st loan. This will probably mean your cash flow won't be very good if anything at all, but it's better to take it out as your primary residence now rather than wait until it's a rental because it's harder and higher rate to get a second loan on a rental, even if you don't need all of the available money, might be smart to have extra reserves, so you can buy another one next year too. Just make sure you will still qualify with DTI. When you qualifying for the new primary residence you can put a lease on the current house and count 75% of the rent against your mortgages, so that will help your DTI.
Real Estate Agent · Phoenix, AZ · Member since 2022 · 41 posts · 21 votes
3y
Hi Sam,
I am currently doing something similar to what Josh mentioned. 5% down using equity from current primary. I will repay it with the rental money so I am considering it as an expense for the rental.
If you have the remaining 15% leftover from the original down payment, finding a value add situation could increase your equity on the new primary, allowing you to follow Josh's point about rinse and repeat next year. Good luck!
After further consideration we opted to do 5% down. The entirety of the new house will be "loan money" so it makes more sense to have the bulk of it be at the lower interest rate (mortgage). This also lowers the HE Loan amount we'd be paying for our investment property.
At the end of the day, we've decided to take a HELOC out for the 5% down payment. After reading a few posts around here, we also decided just to sell our current primary and realize the equity now. After factoring in all of the expenses, a $300,000 house renting for $2,000 per month isn't worth it. We'd be locking up tons of equity with little to negative cashflow.
We'll find a proper house to do a buy and hold and jump in at the time. For now, we'll move on to a new primary and weather whatever the market and the SVB fiasco brings.