Does A Cash Out Refinance Make Sense For My Situation?

19 Replies

Hi all,

Trying to slowly build our buy and hold portfolio in Buffalo NY to eventually allow rental cash flow to replace my W2 salary. Right now I own 2 duplexes. One was a personal residence that we bought about 10 years ago for about $89,000 and have since moved out of and rent out both units. It's now worth around $200,000 and I am trying to figure out if I should cash out refinance and end up with about $63,000 (leaving 70% LTV) cash to use for another rental down payment, or if I should just ride out the remaining 20 years of this mortgage with a small balance (only $62,750 left). It's going to cost around $11,000 in closing costs to do the refinance, and I would be going from 4.125% to 3.125% with another 30 year fixed loan for $140,000.

Is there a downside to doing the cash out refinance that I'm not thinking about? Wish I could tap into all of that equity another (read: cheaper!) way, but it seems impossible to get a HELOC on an investment property. Any thoughts/suggestions would be greatly appreciated!!

Thanks,

Patrick


Has the snow melted up there yet? JK.

The answer to your question is dependent on your personal risk tolerance. As for me, I would do it. I'm basically doing that now on a couple of properties. I'm closing both within the next 10 days. Keep on growing.

Originally posted by @Dana Whicker :

Has the snow melted up there yet? JK.

The answer to your question is dependent on your personal risk tolerance. As for me, I would do it. I'm basically doing that now on a couple of properties. I'm closing both within the next 10 days. Keep on growing.

Just barely, wouldn't be surprised with a blizzard tomorrow! haha

Yeah, I hear you. It would still cash flow really well ($325/unit or so), with a 12% cash on cash return or so...so I'm inclined to do it :-)

Hi Patrick, I'm also here in Buffalo. Who is charging you $11K in closing costs on a $140K mortgage? I just did a cash out refi that closed 2 months ago for $136K and my closing costs were maybe $7K, which was high as it was an out-of-area lender (only reason I went with them was no prepayment penalties and I don't anticipate holding this property very long). I think you are getting burned on the refi costs, but maybe I don't know the whole story. 

I have been researching 2nd mortgages on investment properties for a while and have yet to find a local lender willing to be in 2nd position. Perhaps your primary mortgage holder with allow a LOC on the original property?

Originally posted by @Timothy Smith :

Hi Patrick, I'm also here in Buffalo. Who is charging you $11K in closing costs on a $140K mortgage? I just did a cash out refi that closed 2 months ago for $136K and my closing costs were maybe $7K, which was high as it was an out-of-area lender (only reason I went with them was no prepayment penalties and I don't anticipate holding this property very long). I think you are getting burned on the refi costs, but maybe I don't know the whole story. 

I have been researching 2nd mortgages on investment properties for a while and have yet to find a local lender willing to be in 2nd position. Perhaps your primary mortgage holder with allow a LOC on the original property?

Tim, my quote from Five Star Bank. My understanding is that the LLPA (essentially "points"?) is higher so they can do a lower rate (3.125% compared to my other quotes of 4.25% & 4.5%). The other quote was like $9,100 so it probably makes sense to pay an extra $2,000 upfront to have a 1% less rate. Do you have any local recommendations?

Also, the original mortgage is through M&T and I actually do have a HELOC, but only for $25,000. I opened it right before we moved out (had to still be occupying in order to set it up) and I should have done a higher amount. I already asked if they would approve increasing the amount but because it's now purely an investment property, they cannot increase the limit. Maybe keeping the current mortgage and utilizing the $25,000 HELOC is a reasonable path...just a little slower than the "cash out refi and buy 2 more properties" path...

 

@Patrick McCracken , aren't you effectively asking for a third mortgage against the same property? Even though you haven't spent your $25k HELOC yet, its liability would still take your LTV beyond the 70% you were talking about, right?

As well as agreeing with those folk who say $11k closing cost seems way too high, I suggest that the main issue you have (as with any Investor who can get cash out of thin air) is holding out until you find the right bargain (rather than only relying on future value increases which may or may not continue).  Well done on the historic gains though...

Updated about 1 month ago

Edit: Forget my mention of "third mortgage". Of course, a Refi would pay out the old loan - but I was unaware it would cancel your HELOC (as you mentioned below).

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.


Originally posted by @Brent Coombs :

@Patrick McCracken, aren't you effectively asking for a third mortgage against the same property? Even though you haven't spent your $25k HELOC yet, its liability would still take your LTV beyond the 70% you were talking about, right?

As well as agreeing with those folk who say $11k closing cost seems way too high, I suggest that the main issue you have (as with any Investor who can get cash out of thin air) is holding out until you find the right bargain (rather than only relying on future value increases which may or may not continue).  Well done on the historic gains though...

My understanding is that the $25,000 HELOC would get closed and the old loan paid off, so that this new mortgage is 70% LTV and the only mortgage on the property. I am confident in my ability to analyze a deal and hold out for good deals...just trying to accelerate my timeline by utilizing the built up equity that I already have.

 

Originally posted by @Mike Redick :

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.

Thanks Mike - I've heard mixed reviews about PenFed - how was your experience opening a HELOC on investment property with them?

Yes, the fixed, low rate for 30 years (as opposed to the variable HELOC rate) is part of what makes the refinance an attractive option (in addition to the cash out).

@Patrick McCracken

11K is about right at that rate.  You're paying a couple points to buy it down to 3.125% right?  That's $2,800 right there.  Another $1200 in underwriting/processing/admin takes it to $4000.  Add in about $2500 for the title attorney, $2000 for insurance, $700 for an appraisal- that's $9200.  I believe you have to pay recordation taxes on the new money in New York.  Set up an escrow account and you're right around 11000.

I could be wrong and those are certainly round numbers, but buy downs pay off over time, not up front and all the parts to getting a loan title attorneys, insurance agents and appraisers add up.  Look at your loan estimate and see what the difference would be by not buying the rate down and how long it will take to realize a gain by buying it down and then make a decision about which way would be better.  It's all math.

Having said all that, I would take the cash.  Money won't be this cheap for long.  The opportunity to get 30 year money on an investment property that cash flows at 3.125% is almost gone.  Fannie rates have already jumped into the mid 4's for most banks.

Stephanie

@Patrick McCracken first off, congrats on having a solid asset. I bet it feels good watching the market shoot up right in front of you after you have owned this bad boy for a decade! Well done. 

Short answer to your question from me is yes. I think it’s a great idea to go ahead and refi out to use that money for a down payment or two. 

Another option that was hinted at above is taking out a LOC on the total equity. Not just the 25k but all of it. Let's say you have total equity of about 135k. You should be able to get an LOC for 80% of that. Let's call it 110k.

Under normal circumstances, I’d do the cash out refi, but I’m tempted to suggest getting this larger line of credit and maybe investing in a cheaper market and seeing if you can pick up some better deals by offering cash, then refinancing out of those instead. Then just keep recycling this money from the line in order to do more. If you cash out refi and use it for a down payment, the game is over after 2 deals until you build up enough equity to jump back in. But if you keep recycling it, you might be able to get more doors faster. 

@Patrick McCracken just be aware that taking cash out beyond purchase value cannot be expenses as interest against that property. You have to split your interest and the interest on the $63,000 can only be expensed against the new property. Keep the money in a separate account until it is used for down payment. This is due to IRS tracing rules. The potential down side is if the money sits unused, you are stuck paying the interest and cannot claim the deduction. 

The closing costs seem high, but freeing up $63K for another acquisition could be worth it. Just be careful on tax treatment and be aware that you will end up with two properties that essentially 100% financed. That means lower cash flow than if you had the traditional 20-25% down payment. 

Originally posted by @Patrick McCracken :
Originally posted by @Mike Redick:

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.

Thanks Mike - I've heard mixed reviews about PenFed - how was your experience opening a HELOC on investment property with them?

Yes, the fixed, low rate for 30 years (as opposed to the variable HELOC rate) is part of what makes the refinance an attractive option (in addition to the cash out).

What kind of mixed reviews? They've been pretty good for me, some of their processes are archaic (phone calls instead of emails, etc.) 

The one minor issue I had is they insisted on a "drive by" appraisal where someone just looks at it from the outside, and that came back with a lower valuation than I thought... but you can request a real appraisal after that if you're sure the value is higher.

Originally posted by @Mike Redick :
Originally posted by @Patrick McCracken:
Originally posted by @Mike Redick:

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.

Thanks Mike - I've heard mixed reviews about PenFed - how was your experience opening a HELOC on investment property with them?

Yes, the fixed, low rate for 30 years (as opposed to the variable HELOC rate) is part of what makes the refinance an attractive option (in addition to the cash out).

What kind of mixed reviews? They've been pretty good for me, some of their processes are archaic (phone calls instead of emails, etc.) 

The one minor issue I had is they insisted on a "drive by" appraisal where someone just looks at it from the outside, and that came back with a lower valuation than I thought... but you can request a real appraisal after that if you're sure the value is higher.


I just did some more digging and it seems like generally PenFed HELOC's are going pretty smoothly. Not sure what I saw before that made me think otherwise. I am actually liking this idea more. I saw something though that in NY you are responsible for paying any City/County/State taxes. I saw that sometimes there is a pretty big recording tax, but it says in their fine print that they cover recording, but I'm not sure if that's the tax or not. What kind of closing costs did you see when doing a HELOC through PenFed? 80% of my equity is probably around $110,000.

Also, I have been considering getting the exterior of the home painted as there is tons of chipped paint, etc. The units are beautiful on the inside but I'm worried that a "drive by" appraisal would not work in my favor. Do you think it makes sense to shell out $5,000 to have it painted before I start this process with PenFed? Obviously it also helps make it a more desirable home for potential renters too when it's nicely painted.

 

Originally posted by @Patrick McCracken :
Originally posted by @Mike Redick:
Originally posted by @Patrick McCracken:
Originally posted by @Mike Redick:

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.

Thanks Mike - I've heard mixed reviews about PenFed - how was your experience opening a HELOC on investment property with them?

Yes, the fixed, low rate for 30 years (as opposed to the variable HELOC rate) is part of what makes the refinance an attractive option (in addition to the cash out).

What kind of mixed reviews? They've been pretty good for me, some of their processes are archaic (phone calls instead of emails, etc.) 

The one minor issue I had is they insisted on a "drive by" appraisal where someone just looks at it from the outside, and that came back with a lower valuation than I thought... but you can request a real appraisal after that if you're sure the value is higher.

I just did some more digging and it seems like generally PenFed HELOC's are going pretty smoothly. Not sure what I saw before that made me think otherwise. I am actually liking this idea more. I saw something though that in NY you are responsible for paying any City/County/State taxes. I saw that sometimes there is a pretty big recording tax, but it says in their fine print that they cover recording, but I'm not sure if that's the tax or not. What kind of closing costs did you see when doing a HELOC through PenFed? 80% of my equity is probably around $110,000.

Also, I have been considering getting the exterior of the home painted as there is tons of chipped paint, etc. The units are beautiful on the inside but I'm worried that a "drive by" appraisal would not work in my favor. Do you think it makes sense to shell out $5,000 to have it painted before I start this process with PenFed? Obviously it also helps make it a more desirable home for potential renters too when it's nicely painted.

Tried to look everything up, but couldn't find everything. If I remember correctly, they covered the actual closing costs but I did have to cover the taxes, appraisal fee, and a notary for the final signing. The taxes were only $305 so not a big deal really.

One thing I did just notice while looking everything up is there is an annual fee of $99 unless you pay that much in interest that year. So that's a little annoying but if you're paying it down over time it won't really be an issue.

 

Originally posted by @Mike Redick :
Originally posted by @Patrick McCracken:
Originally posted by @Mike Redick:
Originally posted by @Patrick McCracken:
Originally posted by @Mike Redick:

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.

Thanks Mike - I've heard mixed reviews about PenFed - how was your experience opening a HELOC on investment property with them?

Yes, the fixed, low rate for 30 years (as opposed to the variable HELOC rate) is part of what makes the refinance an attractive option (in addition to the cash out).

What kind of mixed reviews? They've been pretty good for me, some of their processes are archaic (phone calls instead of emails, etc.) 

The one minor issue I had is they insisted on a "drive by" appraisal where someone just looks at it from the outside, and that came back with a lower valuation than I thought... but you can request a real appraisal after that if you're sure the value is higher.

I just did some more digging and it seems like generally PenFed HELOC's are going pretty smoothly. Not sure what I saw before that made me think otherwise. I am actually liking this idea more. I saw something though that in NY you are responsible for paying any City/County/State taxes. I saw that sometimes there is a pretty big recording tax, but it says in their fine print that they cover recording, but I'm not sure if that's the tax or not. What kind of closing costs did you see when doing a HELOC through PenFed? 80% of my equity is probably around $110,000.

Also, I have been considering getting the exterior of the home painted as there is tons of chipped paint, etc. The units are beautiful on the inside but I'm worried that a "drive by" appraisal would not work in my favor. Do you think it makes sense to shell out $5,000 to have it painted before I start this process with PenFed? Obviously it also helps make it a more desirable home for potential renters too when it's nicely painted.

Tried to look everything up, but couldn't find everything. If I remember correctly, they covered the actual closing costs but I did have to cover the taxes, appraisal fee, and a notary for the final signing. The taxes were only $305 so not a big deal really.

One thing I did just notice while looking everything up is there is an annual fee of $99 unless you pay that much in interest that year. So that's a little annoying but if you're paying it down over time it won't really be an issue.

 

Thanks for checking, appreciate that. I talked to them on the phone and they said I would only have to pay for an appraisal if they had to send someone...might be able to do it virtually. And yes, I figure the $99/yr is well worth it to keep it open, but I'll realistically be paying more than that per year in interest so should be pretty negligible.

 

New York is an expensive state here are the real costs:

Escrow $500;  title $451; tax transfer $1025; notary $175; recording $80

Lenders charge an underwriting or processing fee about $1400

appraisal $450-500 no appraisal waiver is ever granted on a cash out loan, your loan officer is off.

  total hard costs without points and tax or insurance should be $3056

there are HUGE pricing adds for a cash out investor loan as Fannie and FReddie don't want to buy them right now.

2.625 + .5 to points not rate 

right now 4.5 rate can get you to zero points or $4375 in points to get to "par"

or 4375+3056= $7412

FAR FAR cheaper in long term to get rate of 4.5 at no points and pay $3056 plus your taxes, insurance and prepaid interest which are not charges; just on-going costs.

The difference in payment from 4.5 and 3.125 is pennies but $11000 is way too high. 

$3588 is not your property tax impound no way...

You may find some lender won't want to do a cash out non owner as they can't sell them, then they price higher as there is a big risk to keep for long term.

Go back to your lender and ask them about increasing the rate to 4.5 and give you better numbers. 

This is not a commitment to lend, rates change a couple times a day, I am not advertising just teaching.

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