Cash out refi w/ higher interest rate but no PMI or HELOC

10 Replies

Hey BP, Ive got a duplex that has an interest rate of 3.75% that I do not live in and has grown in its equity over the past few years. It was purchased with an FHA loan and cash flows about $280 a month now that we no longer live there and have both units rented out. It still has PMI on it but I want to use the equity in the property to buy another property. The property is worth about $280k and I owe $178k. So my question for you is would you: A) Cash out refinance the property, shed the PMI, but have a higher interest rate -Or- B) Pull a HELOC out on the property and use that cash to fund another property, leaving the interest rate where it is on the mortgage, but also leaving the PMI on the property? I'm not sure how much I'd save per month on the PMI if I refi'd out, or if the higher interest rate would pretty much break the payment even without the PMI. Thanks so much for any help you great people can give!

Hey Todd,
I’m in a similar situation. It seems that banks won’t do a HELOC on an investment home (primary only). The closing takes place in your living room.
If there is a (legal) way around this, I’d also love to know.
Refi rate was too high. My PMI is 1%. Losing pmi didn’t cover the difference in new rate. I’m still considering in order to have opportunity cash.
Good luck.

Originally posted by @Todd Fithian :
Hey BP,

Ive got a duplex that has an interest rate of 3.75% that I do not live in and has grown in its equity over the past few years. It was purchased with an FHA loan and cash flows about $280 a month now that we no longer live there and have both units rented out. It still has PMI on it but I want to use the equity in the property to buy another property. The property is worth about $280k and I owe $178k. So my question for you is would you:

A) Cash out refinance the property, shed the PMI, but have a higher interest rate -Or- B) Pull a HELOC out on the property and use that cash to fund another property, leaving the interest rate where it is on the mortgage, but also leaving the PMI on the property?

I'm not sure how much I'd save per month on the PMI if I refi'd out, or if the higher interest rate would pretty much break the payment even without the PMI.

Thanks so much for any help you great people can give!

 Hi Todd,

Can you post details like your loan balance, P&I payment, etc etc? 

Hey @David Jackson Thanks for your response! Makes pretty good sense what you're saying and honestly that's kind of what I feel like Ill be dealing with as well. The Interest rate hike seems like its going to outweigh the PMI knock off. I heard that there are places that will do a HELOC on an investment property but you have to search around but I could be totally wrong. If you find a good way of using your equity let me know!

@Chris Mason  Thanks for responding! Here are the numbers:

Monthly Payment: $1,255.60

Principle balance: $177,466.11

Principle: $301.61

Interest Payment: $555.52

Escrow Payment: $398.47

Mortgage Insurance Payment: $125.36

Additional Principle I pay each month: (Roughly) $144.40, to make the monthly payment an even $1400.

I was given a rough appraisal of about $275K to $290k, and I know id need to meet the 75% LTV rule, so there's probably not as much Cash out equity available as I'm hoping for, but I figure Id see what my options are. Thanks again for any help!

Originally posted by @Todd Fithian :

Hey @David Jackson Thanks for your response! Makes pretty good sense what you're saying and honestly that's kind of what I feel like Ill be dealing with as well. The Interest rate hike seems like its going to outweigh the PMI knock off. I heard that there are places that will do a HELOC on an investment property but you have to search around but I could be totally wrong. If you find a good way of using your equity let me know!

@Chris Mason  Thanks for responding! Here are the numbers:

Monthly Payment: $1,255.60

Principle balance: $177,466.11

Principle: $301.61

Interest Payment: $555.52

Escrow Payment: $398.47

Mortgage Insurance Payment: $125.36

Additional Principle I pay each month: (Roughly) $144.40, to make the monthly payment an even $1400.

I was given a rough appraisal of about $275K to $290k, and I know id need to meet the 75% LTV rule, so there's probably not as much Cash out equity available as I'm hoping for, but I figure Id see what my options are. Thanks again for any help!

Hmmmm I'm not seeing it really pencil out as being worth it for either a HELOC or cash out refinance.

70% LTV is the cap for Fannie/Freddie cash out refi on a 2-4 unit investment, so you'd be looking at pulling less than $20k out. Not worth giving up that killer rate... even if you add the PMI, it's 3.75% + 0.85% = 4.6% as your current effective interest rate. Even if you just refinanced to drop the PMI, you wouldn't be getting better than 4.6% on a multi-unit investment property.

So, good news is that you're already all set with a great mortgage relative to what you'd get today.

Bad news is another 500 people in the mortgage industry that always focused on rate/term refinances, rather than purchase business, just lost their jobs, because you are far from the only one in that position. But, hey, that writing has been on the wall for years. They should have "rate proofed" their practices.

You might be able to find a HELOC, and those don't have closing costs, so it'll be up to you if it'll be worth the hassle of going through the process for such a small HELOC. Regional banks and credit unions are generally the best places to look, and HELOCs vary greatly by lender... it's not like the Fannie/Freddy stuff where you jump through all these hoops to shave 0.125%, it'll be easily 0.75% or more of a spread between lenders.

@Chris Mason your analysis makes total sense. In a way I had a gut feeling that's what the issues I'd have were, you're just way better at explaining it! So thanks for that. We actually aren't looking for a large HELOC, we really just want something to put us over the top with our savings that we already have so that might actually work. I'll check into a credit union for a HELOC but like you said I'll stay away fro a refi now that I know itd be a bad idea. Thanks again!

Originally posted by @Todd Fithian :
Hey BP,

Ive got a duplex that has an interest rate of 3.75% that I do not live in and has grown in its equity over the past few years. It was purchased with an FHA loan and cash flows about $280 a month now that we no longer live there and have both units rented out. It still has PMI on it but I want to use the equity in the property to buy another property. The property is worth about $280k and I owe $178k. So my question for you is would you:

A) Cash out refinance the property, shed the PMI, but have a higher interest rate -Or- B) Pull a HELOC out on the property and use that cash to fund another property, leaving the interest rate where it is on the mortgage, but also leaving the PMI on the property?

I'm not sure how much I'd save per month on the PMI if I refi'd out, or if the higher interest rate would pretty much break the payment even without the PMI.

Thanks so much for any help you great people can give!

PenFed 80% LTV non-owner occupied

Originally posted by @David Jackson :

Hey Todd,
I'm in a similar situation. It seems that banks won't do a HELOC on an investment home (primary only). The closing takes place in your living room.
If there is a (legal) way around this, I’d also love to know.
Refi rate was too high. My PMI is 1%. Losing pmi didn't cover the difference in new rate. I'm still considering in order to have opportunity cash.
Good luck.

Just dealt with this today. Wanted to move some dead equity in the form of HELOCs. Intsead, I'll be dumping PMI on my investment without refi - just appraisal. (You can do that instead with just an appraisal unless you bought as FHA.) And then doing HELOC on primary residence.

@Aaron Hunt thanks for the info! I planned on shopping around credit unions, but if that's a good place to start then I'll give them a call. I wish mine wasn't an FHA so I could shed the PMI without a refi but at the time it was the only option. I appreciate the comment!