Take out money on rental for our next house?

Question

With one house paid for and currently building another would you guys recommend getting a loan on the paid for house so we can put 20% down? We have already paid 5 percent down so would only have to pay the other 15. Was told that it would be better to have a payment on the rental for tax reasons. Any thoughts?

Jonathan Bombaci · Answer

I’d say probably yes, but do your analysis.

Using leverage from the first to get the 20% you need for a conventional loan will most likely net a lower interest rate  overall but that depends on your other financing options. Can you get the money anywhere else? Will the builder or other people in your life loan it to you at a better rate? Find out what the refinance is going to cost and find out what the loan will look like on the new property under a number of scenarios. We have a few credit unions that’ll lend on more than 80% of the purchase price if the value and relationship makes sense.

Also take this time think about the future. Are you going to buy any other properties? Should you pull any additional money out of the first one with the refinance for the next one?

These are good problems to have. Congrats and Goodluck!

Josh Bakhshi · Answer

Adam,

I understand better where you are coming from and I do agree with you.  All too often I hear people on here going 120% LTV and Ramsey saying all loans are bad.  You're point is logical and wise.  I would suggest getting a HELOC on the paid off property, even if rates are higher and variable.  You seem like a responsible enough guy that you will be fine.  I vote yes.

Jonathan Bombaci · Answer

So based on those numbers the refinance will cost you $300 a month. The 95% LTV will cost about $425 more a month with the PMI, vs a 80% conventional loan. So is $125 a month or $1500 a year worth going through the refinance process?

Adam Solomon · Answer

@Josh Bakhshi

Thank you so much for the input. I have always played everything on the safe side and that was the plan when paying it off. I read his book and went from pay check to pay check to a paid off house in two years. I wish I went a different route but he did get me to start a budget so I thank him for that.

Adam Solomon · Answer

@Jonathan Bombaci

Thanks for the input, I do want to purchase more properties down the road. I would like to get my feet wet with just the one for a year or so first. We plan on living in the new one for a long time so my thought was to lock in a lower payment with the low rates. The property I am buying now financed at 95% would be about 250 a month more plus I would have to pay about 175 a month for mortgage insurance. The paid off property going off comparable houses in the area should bring in about 1300 a month. The money I would need would put the rental at about a 25 percent ltv and the payment would be around 300 on a 30 year. Don’t know if that helps. Sorry I am a newbie to all this.

Adam Solomon · Answer

@Josh Bakhshi

We paid the 5 percent down on the construction loan. The builder got the loan so it was no cost to us. We just had to give them 5 percent to get the build started. We will be financing it in a few months when construction is done. Instead of going Dave Ramsey I wish I would have just got another house two years ago instead of paying it off.

Josh Bakhshi · Answer

Did you already buy the 2nd property w/ 5%down?  If so, why didn't you do the 20% from the start?  Now it might cost a lot more b/c you have to do 2 more loans and each time that happens, it costs you money and time.

Take out money on rental for our next house?

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