Cash out refinance or Heloc

19 Replies

So I have a four unit property we bought for 505k fha 3.5% down 3.75% interest rate, that we’ve had for a year and looking to cash out refi to get a second property. BUT I’m not the appraisal will come back high enough to pull cash out since every bank I’ve called will only do 75% ltv owner occupied 4 unit. So I’m wondering in the situation the appraisal comes in low should I still refi to get rid of the fha mortgage insurance even at a higher interest rate or get a heloc to get the second property and then refi in a year to pay it off? With the interest rates going up I know it’s better to keep our current rate but how does that work with brrrr method if we can’t get enough cash out? Any suggestions

@Remone Randolph  

Do you think you'll get a heloc for a higher ltv than your cash out refi? If you still live there it may be possible, if it's investment property you're probably looking at the same ltv, in which case I would just go with the refi to get rid of mortgage insurance. 

Either way - you may want to think about doing a rate refi and getting rid of insurance by having your lender pay it. You just need to do the math to see if your increased payment on the interest side adds up to less than your cost savings by eliminating pmi over your hold period.

@James E. Yea I did talk to a couple banks that offered 80% or higher ltv on hel and helocs. I do live in one of the units so that should get me more ltv. I am pondering doing a refi if the cash out doesn’t work just so I can drop the mip/fha and then take out a hel or heloc

@Remone Randolph I agree with @James E. and getting rid of your PMI. PMI really doesn't benefit you in any way. It's really to serve as insurance for your lender and it's money that you don't see coming back to you.

If I were in your shoes, I would first get rid of the PMI by refinancing on the initial loan. I would follow it up with at least applying for a HELOC. You may not be able to utilize it right away. However, if you find an opportunity that generates a return higher than the interest rate on your HELOC, I would tap into that HELOC to scoop up that property.

Fingers crossed and best of luck!!!

@Kristina yea your right I do need to get rid of the insurance. Thanks for the advice

Has the value increased to the point where you can refinance? Your initial loan was 96.5% of LTV, so after a year, unless there is significant appreciation, you are no where near the 25% equity point that you'll need to refinance.

@Jason DiClemente yes the values have risen substantially. There’s 4-5 very similar properties (sq footage, bdr, bth etc) that have sold btw 613k - 699k and another pending around 715k. And since our four unit goes off comps it should be safe to believe our property is in that range. Not too mention our rents are higher than all of the sold properties.

@Remone Randolph 30% - 40% appreciation in one year? Man, that's home run buy!! So the question becomes, what do you pay per month vs. what will the increased interest cost you. I would answer with that it depends nn what kind of rate you can find. It may be a good idea to cash out, but I think a HELOC would be the way to go. You'll be able to access that liquidity at a moment's notice when you need capital.

Not sure if this topic is been discussed in the forum yet but I just learned HELOC interest is no longer tax deductible unless it is used for improvement of the property against which the heloc is borrowed so keep in mind before you go HELOC route.

@Jason DiClemente yes I know I can’t say for sure because I haven’t gotten an appraisal but if based on the comps should be good. Yea I want to cash out refi but rates are around 4.5% and I’m currently at 3.75% so I may save a $100 a month after mip is taken off. But if I do a Heloc and use that as a down payment on the next property then I won’t be able to use a fha again w/o refinancing.

@Rich Lopes are you sure about that? I think as long as it's used for the improvement of a property (regardless if it's the property you took the line out against) it was deductible. Can any CPA's out there confirm (cc @Brandon Hall )? 

I think the intent of the rule change was that you can no longer deduct the interest if you take out a HELOC to pay for a jetski, refinance student loans etc..

If there is significant appreciation and/or you've forced appreciation as well, I'd keep shopping for a HELOC. Since it's owner occupied, there are banks out there who will go up to 95% AND pay for your appraisal. If you can get that done, that same bank may turn around and refi your mortgage too- and now your appraisal has been paid for and you have a HELOC you can use to either make some improvements or acquire a new investment property with another FHA loan. You don't have to use the same bank- many banks will honor a recent appraisal- if the equity is there and you have good credit and DTI, you should be able to go this route. Good luck!

Have you looked into doing a cash out refinance back into a FHA loan? Ik some lenders ussually do 85% ltv. I just finished my cash out refinance for my 4 unit in Mass and I got 100k out. If I went conventional I only would of got 70k-80k.

@Rich Lopes the link you posted is referring to HELOC balances counting as acquisition debt for a primary residence. If you use a HELOC for a rental or business use, the interest becomes business interest and is deductible.

@Corby Goade yes I’ve looked into heloc’s but hesitant because I want to get rid of the fha. But your saying I can find a bank giving up to 95% heloc then refinance the 1st mortgage and heloc into 1 conventional mortgage allowing me to get a 2nd property with fha? Am I understanding that right

@Ryan Short I didn’t want to do fha cash out because I want to get another property using fha as well. 

@Brandon Hall , Thanks but still not clear if the Heloc against primary residence can be used for business/rental use and the interest can still be deductible? In @Remone Randolph 's case, I presumed he is living in one of the 4-unit since he is referring to fha but probably not anymore as his primary residence.

What about Heloc against an existing rental property? Can the Heloc be used for any other purpose other than business or buying other rental property?

Yes, you could get the HELOC and then refinance the primary into a non-FHA loan.

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