Bad idea to use primary residence equity to purchase a rental?

Question

Hello all. I always get such great advice here. I am having a hard time getting a good mortgage on a rental property I have an accepted offer on because it has a pillar and post foundation. I can get a mortgage, but the rates are higher, it has to be insured, and can only be amortized over 25 years instead of 30, all of which affects cash flow. I was just talking to a mortgage broker and he suggested I refinance my primary residence mortgage at a great rate (paying a penalty that is more than made up by the better rate), and use the built up equity to buy the property in cash. It sounds like a great option to me, but is there something I'm not thinking of? This is a radical departure from my original planning and I have to make a decision today to meet financing conditions on our offer.

Kris Haskins · Answer

Great, I would've just read your post and kept on moving, but I feel like I must tell you this...    The fact is, it's very EASY to buy your next house.  It may seem like a large mountain and we both know that most Americans never even buy 1 house not to mention two.  It's all in the mind and your beliefs whether you will or won't take the time to do it.    On the other hand, I want you to know that it's very easy NOT to buy your next house as well.   That's why most Americans don't & end up broke at 40, 50, even 60 years old....    From your writing, i'm sure you're going to make the right choice.   Good luck and GOD bless!!!!!

Dan Mackin · Answer

I personally like HELOCs. Depending on what your rate currently is on your primary it may not make sense to to a refi. I would look at the amortization charts for your current loan and compare it to your new one with the costs rolled in. It will give you a good reference of if it's even worth it. With a HELOC though they will likely do an appraisal as part of it then you can still pull that equity out and only use it when you need to. Plus that process is so much quicker to get done than doing a refi. As Kris said though, make sure you use if for the intended purpose. It's very easy to look at it as extra cash for anything.

Kris Haskins · Answer

OH man, I took out some $ on my 1st house.  I thought I could just go buy whatever I wanted.  After a few years, I spent all the money and was more in debt.  Good thing I paid it back.  In my opinion, a HELOC would be best for you ONLY, ONLY, ONLY if you're buying more equity in another asset.  You can't use it to buy consumable goods or products that will be used.  That was my mistake.  After you use the money, you can simply put it back and have no interest payments. You can make larger payments each month to pay it back early and the rates are really low now,  Good luck, tell us what you did.  Oh, you can get HELOCS from local banks, probably not a broker...

Colin Smith · Answer

I think your mortgage broker sounds like a smart person, but the tolerance of risk is up to you. If you go his route then you will put a lien on your own property. If you finance the rental property, you could then put into an LLC and protect your personal assets if someone were to come after you. But the lower interest rate is tempting. You could always pay cash, do the rehab work to it, put tenants in it, and then do a cash out refinance to get most of your money back out in a year. I would also think its best to the least down so you can buy multiple cash flowing properties and not just 1.

Stephanie D. · Answer

And don't worry, Kris, I have no intention of doing that. I am very financially conservative and the fact that we are even this far along in possibly purchasing our first rental has me crazy nervous!

Stephanie D. · Answer

Thanks all. It turns out the penalty to refinance is much larger than estimated, so maybe not such a good idea. Aside from  great point about separation of personal assets, I'm not sure if I would have been able to claim the interest for the mortgage on my taxes if both mortgages were lumped together.

Great point Dan. The branch manager at the bank where I hold my primary residence mortgage actually suggested that. Apparently, they can even turn part or all of a HELOC into a mortgage with fixed term rates that are competitive with today's mortgage rates. Also keeps all the finances separate which is better for taxes.

Bad idea to use primary residence equity to purchase a rental?

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