How do I take Equity out?

Question

Hello,

I own a home on Long Island that is currently worth about $500,000. The house is fully paid for. I have about $48,000 in cash and would like to purchase my first investment property. Should I do a HELOC? Can I do a Cash-Refi? I do not want to do much if any renovations and with that said that houses are going for about $375,000 - $450,000. My Income is about $65K a year. What do you guys recommend I do? I would like to close within the next 6 months.

Account Closed · Answer

Personally, I would wait for rates to decline and then I’d do a cash out refi at 75% LTV. That equity sitting in your house has no buying power. $375k in cash is a downpayment on $1.5M in real estate at 75% LTV. At 3% appreciation alone that’s earning you $45k per year. Plus the principle lay down.  If it’s stuck in your $500k house it’s earning you $15k per year. Just be cautious with leverage and keep 6 months minimum in reserves at all times.

Mohammed Rahman · Answer

Hey @Wojciech Grajewski - You may want to consider an FHA loan so you wouldn't have to tap into any of the equity in your current home. I also recommend speaking with a loan officer at your local bank directly as they'll be better able to give you an idea on how your scenarios would play out.

I say that because owning a house outright without any debt is a huge accomplishment, congratulations! You want to be wary of taking on debt for the sake of taking on debt especially with rates rising.

Speak with a loan officer, and they'll give you a breakdown of your options.

Scott E. · Answer

Kerry has a great response and feedback for you.

The positive of the cash out refi is that you will have a 30 year fixed loan. But the negative is that you will be stuck with that high payment every month, no matter what, even if you haven't found your investment property yet.

The positive of the HELOC is that you won't be stuck with a payment until you actually use the money. But the negative is that the rate will be variable, and is subject to these fed rate hikes during your draw period.

Kerry Baird · Answer

Rates just went up, and it is difficult to tell what the next steps will be.  Will the Fed cool or will they raise again?  I think history bears out that rates will go higher, as they have been much higher historically.

In my own situation, a cash out refinance will be the way to go as I don't want to risk the variable rates of HELOCs for 30 years.  If I want some cash out for a short period of time, say 3 years or so, a HELOC is the way to go.  Most are fixed in the early years and then adjust after a period of time.  Cash flow from both properties will be needed to pay off whatever financing you choose.   Conversely, you could do a cash out at a reasonable loan to value of 65 to 70% of the value, and then top it off with a HELOC.  Set the HELOC aside for future issues, concerns or property acquisitions.

Also, you don't say if you owner occupy the house.  If you do, the rates and amount you can take out are the best available in the marketplace.  If this is a rental and you have no rental property history, it will be higher rates and more difficult to accomplish.

How do I take Equity out?

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