Refinancing could be the way out

35 Replies

so I'm trying to understand the different types of refinancing and what would be best in my position. Here's the lowdown: I bought a 4 unit for 500k as owner occupied FHA 3.5% down and my current principal is 480k. As of now zillow has my property valued around 550k and with the given market I'll assume that it's in this range. Looking at comparable sales of like properties they have sold at or above the 600k range. My question is this...if let's say around early spring (12 months owning the property) its appraised at 600k and my mortgage balance is 477k which leaves 123k equity. If I'm looking to reinvest in another property using the equity how would the cash out refinance wk with these given numbers as owner occupied assuming 80% LTV? In other words how much would I be allowed to take out?

Secondly with these given numbers and my intentions to reinvest which method would work better; cash out, HELOC or LOC?

Lastly if I was only able to do a 80% LTV cash out could I also do a HELOC for %10 ltv to make a full %90? Would this be a wise move

Howdy @Remone Randolph

If it is appraised at $600K, then, the Refi loan amount would be 480K (80% LTV). You would use that to payoff the existing loan balance of $477K. That leaves you only $3K cash. Don't forget Closing costs. In other words it probably is not worth it.

Do not use Zillow to determine your property value.  Recently sold comps are what you use.

The Heloc will produce the same result.  80% of property value minus amount you still owe (80% x $600K = $480K - $477K = $3K).

Therefore, currently your best option would be a LOC.

As for your last question I think I already answered it.

Wow..There is a property with very similar specs as mine that sold for 613k and another listed at 650k so hopefully the market keeps going up. 

Thanks for responding 

You can probably find a local bank or credit union that will give you a HELOC at 90% LTV for an owner occupied property, thus giving you around $60k to work with (assuming it in fact appraises at $600k). Probably at an interest rate above 8% due to high LTV.

At that high of an LTV, the HELOC will likely be contingent on it being owner occupied, so if you move out of the house and make it a rental, you'd need to close the HELOC.

Hmm..ok well that's what I planed to do was move and make it a full rental prop. So no HELOC right now.

Are there any suggestions on how to force appreciation on residential props for a higher appraisal? I've increased rents already

I know this doesn't answer anything but congrats on the property.

Originally posted by @John Leavelle :

Howdy @Remone Randolph

If it is appraised at $600K, then, the Refi loan amount would be 480K (80% LTV). You would use that to payoff the existing loan balance of $477K. That leaves you only $3K cash. Don't forget Closing costs. In other words it probably is not worth it.

Do not use Zillow to determine your property value.  Recently sold comps are what you use.

The Heloc will produce the same result.  80% of property value minus amount you still owe (80% x $600K = $480K - $477K = $3K).

Therefore, currently your best option would be a LOC.

As for your last question I think I already answered it.

I agree that the refi may not be his best option for cash out re-finance purposes for the reasons illustrated, however it may still be worth while if he is able to get his rate and payments down significantly from the FHA rate he is currently paying.

Wait. If you get a heloc and you move out, the bank would be able to close out the heloc if they wanted to. But you could pull out the money before you move and then the best they could do would be to close out the HELOC. They could not force you to repay the money you already took out.

Obviously, you would be paying the payments on what you took out. But there's no way the bank could force you to pay off the HELOC just because you moved out.

To me, the HELOC is your best option. There are some banks that will do 90% LTV on HELOCs. You are far more likely to get a bank to do a HELOC up to 90% then you are to find a bank willing to give you a LOC of 60k. There are some banks starting to do even more than 90% too.......

I've been doing this for 10 years and I have yet to find a bank willing to give me a LOC. And I own 63 rental properties, have zero negatives on my credit, and have a w2 job paying 6 figures. But they will do rental loans all day long (I have loans with over 8 local banks).

So stick with the heloc. But first, I would recommend a refi because you could knock out your PMI. Then do the heloc for the additional 10%.

Then buy your next one with another low money down loan (fannie mae has 3% down loans too I think). And keep it up as long as you can (i.e. until your 10 conventional spots run out).

One thing I might add though is that you might have to shop your heloc to different loans as you continue buying. I doubt the same bank is going to do more than 1 or 2 heloc's once they see that you're going to be moving every year or two. :-)

One last item to keep in mind too. Most banks have the option to convert a HELOC into a HEL (home equity loan). Basically, the difference is a HELOC is typically interest only payments with a little bit lower rate. The home equity loan is simply converted to a commercial loan amortized over 20 years.

The advantage to a HEL is that the credit agencies may view your heloc as a maxed out credit card and it may affect your credit score. A home equity loan, on the other hand, can be treated as a mortgage (although I believe the size of the loan makes a difference on how its categorized).

So keep that in mind as well. That would apply to both a heloc and an loc.

But I still say that you will have a much more difficult time getting a line of credit than you will getting a heloc. And the interest for a heloc is deductible. The interest for a personal line of credit is not.

Originally posted by @Mike H. :

Wait. If you get a heloc and you move out, the bank would be able to close out the heloc if they wanted to. But you could pull out the money before you move and then the best they could do would be to close out the HELOC. They could not force you to repay the money you already took out.

I would read the fine print on the HELOC loan docs if I were you ... my understanding is that the bank is free to call the HELOC due at any time, whether you are still living in the property or not ... and if you don't/can't pay it back when they call it due either through sale, refinance, or out of pocket, then they can foreclose on you. @Jay Hinrichs back me up here please, or else please correct me if I'm wrong.

I don't believe there's any fine print that would allow a bank to call a loan due at any time or for any reason that they want - other than a due on sale clause or something along those lines. That applies to all loans and not just heloc's.

But there's no way they could simply call a heloc due (ie. must be paid in full) or else be able to foreclose.   That would be pointless. 

The banks can close a heloc at any time they want and for any reason. That I also believe. But closing a heloc and requiring you to pay it in full for no reason are two very different things.

That is the equivalent of a credit card company closing your cc and then telling you to pay the entire balance tomorrow or they're going to come after you.

Thats just not possible - again - other than in certain circumstances like if you were to sell the home being used as equity for the heloc or something.

Originally posted by @Mike H. :

I don't believe there's any fine print that would allow a bank to call a loan due at any time or for any reason that they want - other than a due on sale clause or something along those lines. That applies to all loans and not just heloc's.

But there's no way they could simply call a heloc due (ie. must be paid in full) or else be able to foreclose.   That would be pointless. 

The banks can close a heloc at any time they want and for any reason. That I also believe. But closing a heloc and requiring you to pay it in full for no reason are two very different things.

That is the equivalent of a credit card company closing your cc and then telling you to pay the entire balance tomorrow or they're going to come after you.

Thats just not possible - again - other than in certain circumstances like if you were to sell the home being used as equity for the heloc or something.

 Not true.  Lines of credit can be pulled unlike a term loan.  I had a $200k line of credit when I was starting out.  A bank said "Please bring us a check, we're not renewing your line".  wtf?  I didn't have $200k.   I ended up getting the balance put on a 2 year am and paid ~$10k/month till paid off.  That sucked.   

I learned the danger of LoCs that day. 

@Cody L. But thats a personal LOC. Thats completely different from a HELOC. And my guess is that was some sort of renewal LOC that had some annual renewal or something similar.

HELOCs do not operate the same way. I am 99% sure (there's always that 1% doubt) that a bank cannot call a heloc due and payable.  Otherwise, these banks could give people large heloc's and then call them all due when they're used up just so they could take your house.

why not just refinance it at 80% LTV and then just do another FHA? Obviously then you'd be stuck after the FHA, but it would avoid the high risk and higher interest rates associated with the LOC.

Originally posted by @Mike H. :

@Cody L. But thats a personal LOC. Thats completely different from a HELOC. And my guess is that was some sort of renewal LOC that had some annual renewal or something similar.

HELOCs do not operate the same way. I am 99% sure (there's always that 1% doubt) that a bank cannot call a heloc due and payable.  Otherwise, these banks could give people large heloc's and then call them all due when they're used up just so they could take your house.

 Bank doesn't want your house.

@Carl Pickens i could do that if its appraised @600k minimum. But I just put 30k down for the current one so I at this point my money is in the rebuilding stage. Cash out refinance or HELOC would give me the money to purchase another property using fha

@David Faulkner @Cody L. @Carl Pickens     Carl... not to sound demeaning.. however your way off base..

Heloc's written by institutional lenders ALL have call provisions... and its not to TAKE your house.. geez  where did you get that idea.

The banks hire professional companies to do statistical analysis of loan portfolios and Helocs are right up there..

they look at your profession your market you current situation. and if they deem those to be risky.. they call the loans or freeze your helocs  they normally don't foreclose but they can freeze it so you can't pull any more money from it.

I bailed out a lot of flippers in the recession who where half way through projects and were used to using their heloc on their personal resi as their rehab funding only to be froze out and not able to finish the project.. and of course they had a big money first usually that was ticking away...

I encourage anyone who thinks they want a heloc to simply read all 45 pages of your loan docs you will find the call provisions buried in there flat gurantee it..

Originally posted by @Jay Hinrichs :

@David Faulkner @Cody L. @Carl Pickens    Carl... not to sound demeaning.. however your way off base..

Heloc's written by institutional lenders ALL have call provisions... and its not to TAKE your house.. geez  where did you get that idea.

The banks hire professional companies to do statistical analysis of loan portfolios and Helocs are right up there..

they look at your profession your market you current situation. and if they deem those to be risky.. they call the loans or freeze your helocs  they normally don't foreclose but they can freeze it so you can't pull any more money from it.

I bailed out a lot of flippers in the recession who where half way through projects and were used to using their heloc on their personal resi as their rehab funding only to be froze out and not able to finish the project.. and of course they had a big money first usually that was ticking away...

I encourage anyone who thinks they want a heloc to simply read all 45 pages of your loan docs you will find the call provisions buried in there flat gurantee it..

 Jay... you clearly did not read my post in relation to the post I quoted, I said nothing of the sort... 

@Carl Pickens   my bad your right  @Mike H.   my comments were meant for your reply... having dealt with this issue many many times.. banks don't loan to own.. .never have... now private lenders now that's another story but private lenders don't do helocs either. :)

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