Refinancing to pull out equity for down payment+rehab cost

5 Replies

Hi Everyone,

I'm not sure if I picked the right forum but here is my scenario and hopefully someone can assist us: Me and my wife are trying to refinance our main property in order to cash out $50,000 from our equity. 50K is about 30-40% of the entire equity so we are not totally maxing out the equity available, just FYI. This amount is the amount we will be using as a combined down payment and rehab cost for the 1st property we are buying. We are given a 4.375% rate for 30 years. I have a feeling that this rate will not go down anymore. Should we lock on the 4.375% rate or wait for it to go down?

Thanks in advance.

Earl Melendres

Earl,

My thoughts would be to look into a home equity line of credit (HELOIC). Have it appraised and see what the bank will issue on the remaining equity. Banks typically will do a HELOC up to 80% of the appraised value however, I know a lender that will do 100% HELOC on your personal residence.

If you intend to buy and hold you could take out the HELOC, use the money to purchase and rehab your investment property with all cash. Once the investment is up and running, refi that property to pay off the HELOC. There is a line of credit option or also a home equity loan product available. A HELOC has interest only payment option as well. So your payments on the money taken out would be minimal. Then after you have paid back the money taken out, you can continue to use the HELOC for the purchase of other properties. Qualifying for a HELOC and the "loan/application" process is smooth and simple. Also, a HELOC has different debt to income ratios. Also, if you refi there is probably going to be closing costs and fees associated with that. Typically a HELOC has no fees as the bank covers the appraisal and it is considered a consumer product. So the underwriting is different as well.

My vote would be take out a line of credit and use that to expand your portfolio. Just my thoughts though!

Justin,

I appreciate your feedback. The strategy about refinancing the investment property to pay for the HELOC really makes alot of sense. I just have never considered HELOC as an option probably because I was under the impression that it is like a credit card that you can only use in a certain place and when you do a cash advance, you'll have to pay fees. I will look into HELOC now and see how I can use it instead of refinancing our house.

Question, does HELOC have the same interest rate as refinancing? Would HELOC be a better option than refinancing if its a flip?

Thanks again,

Earl Melendres

Originally posted by @Earl Melendres :

Justin,

I appreciate your feedback. The strategy about refinancing the investment property to pay for the HELOC really makes alot of sense. I just have never considered HELOC as an option probably because I was under the impression that it is like a credit card that you can only use in a certain place and when you do a cash advance, you'll have to pay fees. I will look into HELOC now and see how I can use it instead of refinancing our house.

Question, does HELOC have the same interest rate as refinancing? Would HELOC be a better option than refinancing if its a flip?

Thanks again,

Earl Melendres

Earl,

HELOC's are similar to a traditional mortgage. I just had a friend of mine secure a home equity loan for $230k @ 3.9%. A home equity line of credit can be used for whatever you want. It is similar to a credit card that is why it's a "consumer" product as it essentially is a big credit card except... it's secured by your house ha.

A HELOC will be a better, smoother option if you find a lender willing to work with you. The process is simple (less than 30 days) and from my experience no fees.

If you're going to buy and hold the property I would still attempt to do a line of credit and then once the property is rented, refi the rental property to pay off your HELOC on your personal home. There are investment property lines of credit as well that you could look into. So you'd basically be taking one line of credit to pay off the other.

If you're going to flip the property- check into a available HELOC's... then once the property you just bought sells, take the proceeds that were used to buy/rehab the property and pay off the HELOC. Since it is a line of credit, that money can be used for your next property. Make sure though you have an exit strategy. Meaning, even if you're going to flip this property, worst case scenario, have a lender willing to refi it if it won't sell. That way you can pay off the HELOC on your personal home.

@Justin Thompson

Thank you Justin for this information! We will certainly consider this option. I appreciate your time!

Originally posted by @Earl Melendres :

@Justin Thompson

Thank you Justin for this information! We will certainly consider this option. I appreciate your time!

No problem sir! Hope all works out for you!

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