Down Payment
Basically my question is, Is it a bad idea to use a HML for a down payment on your first property?
I will be fresh out of college next summer when I intend to buy my first property. By that time I will have about 15K to work with but don't exactly want to zero out my account.
I will have a job where I am making decent money next year and will be living at home so I will not have huge expenses. This is why I feel if I were to get a HML for say 20K on a quad worth 100K something along these lines I would fare OK.
I would clearly be able to pay off that HML but it just worries me a bit to have to pay off two loans. It also scares me to zero out the account. I didn't know if anyone has done this or something like this before.
Thanks for any help.
A couple things:
- There is nothing inherently bad about an HML. The question is whether you really would rather get the HML at whatever rate it is vs using your own money. Certainly, if you could get HML at 4% interest rate, you would. And certainly, if the HML were 25% interest, you'd pass. Likely it will be somewhere in between; you need to figure out the cost of capital for that HML and decide whether it's worth the value of keeping your own money secured.
- What makes you think you'll find a quad that will cash flow with 100% down? You should make sure you fully understand how to analyze properties, and that you are confident that even at 100% LTV, you will cash flow on it.
- You need to make sure that you have a plan to repay the HML. Oftentimes HML will have a short-term (1-3 year) balloon payment. Will you have the money to repay it when it comes due?
Thanks for your help Jason. To answer your questions. I would have the job and then the money in my savings so I would easily have 20K or even say 23K in a year. I would be putting 20% down and yes I have found properties that would cash flow.
What are the usual rates for a HML. I am sure they differ but just on average? Thanks again for the quick answer Jason.
Hard money runs 0 to 6 points, 12% to 18%. Hard to really say, though, what it is in your area.
Even with hard money, you WILL need some of your own money. You'll have to make the IO payments on the loan, and you'll have to front the rehab costs, then get a draw on the loan to get your money back.
Do the math for yourself. Consider the hard money loan, all the costs for the loan, payment, and the refi vs. getting a loan up front with a down payment and paying the rehab yourself. Without knowing more details, hard to say which works better for you.
Its not clear if you want to hold property or fix and flip. If you want rentals, you definitely don't want to zero out your reserves. Lenders will want 6 months PITI payment in reserves on the permanent loans. You need to be ready if a furnace or roof needs replacement.
Thanks Wheatie. I would be using this as a rental and that is the main reason of not wanting to zero out the account. I would have no problem with taking out 5K even up to 10K but all of it would just scare me.
Could anyone explain points on a loan? I have tried to look but never got a good understanding. I may have just been looking in the wrong places...[/i]
1 point is equivalent to 1% of the total loan.
So, if you got an HML for $20,000 with 2 points, you'd be required to pay $400 (2% of the total loan) upfront as a loan fee.
Wow, thats pretty simple. Thanks Jason!
Also, back to your original post, hard money lenders are unlikely to lend you the down payment. They will lend you a first mortgage. They will want to be in first position. After you fix it up, you can refi into a long term loan. Its a pricey way to go because of the costs of the hard money and the extra closing costs with the refi. But it will conserve your cash.
Yeah I figured it would be more complicated and a bit pricey. I am just trying to find all the routes and to see which is best. Hey, I still have a while to study and get my available money up there. Thanks Wheatie.
Here is what I am recommending.
Use your credit cards for the Down Payment if you can get a 0% or less than 5% balance transfer rate for upto 12 months. Once you get the property, refi with a conventional loan with cash out and pay off the card.
If you do not have enough credit line to do that, call and ask the customer service rep to double it. If they can't do it, ask for a supervisor and ask them. Also while you are on the phone with them, ask them about the balance transfer programs. Programs come and go all th time, so call back periodically. Most credit companies will increase your credit line every six months if you ask them to.
Also, pay attention to your bank statement closing dates. When you go to get your mortgage, they are going to want the last two monthly statements. If they see a deposit for 10K which appears to be not normal, they are going to ask where did that money come from. If you tell them its a balance transfer they are going to reject your loan application. So when you go to buy, you need to have two statemtents with monthly balances that include the 10K in my example, but no deposit to show for it,so that no flags are raised.
That is one why to do it.
Have you thought about an FHA loan? Its typically for first time home-buyers (which you sound like you are). Typically, you only have to put 3% down on a home.
If you used half of your savings of 15K you could buy 215,000 worth of property.
That way youd only have one loan, still have money in the bank, and be making bank with your Cf's.
Best of luck!