Best method for pulling out equity

7 Replies

I recently bought my second home that I am living in and heavily renovating. We bought it as is and it appraised for $12000 more than we paid and we are currently changing the layout of the main living spaces and doing a full gut and reno on the kitchen, losing all wall paneling. Replacing with drywall, bamboo floors in the kitchen and family that lacked wood, and all new trims, etc. We are spending about $20,000 all said and done, and based on recent comps, I am expecting the value to go up to about $160k, possibly a little higher depending on the market.

My question is, once I finish the renovations, and I am past the 6 month seasoning period, should I be trying to refinance for 80% of the ARV, and hopefully get out of PMI (currently it is financed FHA), or should I be looking for a HELOC? In the case of a HELOC can I just request a new appraisal from the bank to assess to ARV?

Any advice is appreciated!

I'd say it depends on your goals. What would you do with the cash you pull out via refinance? Or, if no cash is coming out, is it worth the ~$3000 origination fees and closing costs to do the refinance only to avoid .85% in PMI? Or would it be better to just accelerate your principal payments over the next few years? Are you going to hang on to the house for more than 3 years? Or are you planning on selling soon?

Originally posted by @Jonathan Towell :

I'd say it depends on your goals. What would you do with the cash you pull out via refinance? Or, if no cash is coming out, is it worth the ~$3000 origination fees and closing costs to do the refinance only to avoid .85% in PMI? Or would it be better to just accelerate your principal payments over the next few years? Are you going to hang on to the house for more than 3 years? Or are you planning on selling soon?

 That is what I am trying to decide. I have one rental house currently, and want to buy more buy and hold properties over time. I am currently trying to decide if I would be better served to sell after the minimum 2 years and take the profit tax free, or stay and use my equity to fund another property.

@Jacob Edmond

Do you have enough equity where you could do a cash out refinance? If so, how much cash could you pull out?

Another question... do you have enough cash on hand for a 3-10% down payment on a new house?

Originally posted by @Jonathan Towell :

@Jacob Edmond

Do you have enough equity where you could do a cash out refinance? If so, how much cash could you pull out?

Another question... do you have enough cash on hand for a 3-10% down payment on a new house?

I'm not sure how much equity is needed for a cash out refi, that's part of what I'm looking to find out. Just based on my estimations, I think I will end up owing just over $100k and the house will be worth  in the $160s once my reno is done. 

Currently I have enough to do a 3-5% for the price range of houses I would be looking at, not enough for conventional.

I'll tell you what I have done. I found a single family house in which the owner sold it to me on terms with $5,000 down. I bought it for $55,000 and I borrowed an unsecured loan of $8,000. The terms were 8% annually over 30 year amortized with monthly payments of $366.88. I spent the next 3 years rehabbed it using my pay check from my job, left over money weekly. I had it appraised at $98,000 and the market was a sellers market at the time. After 3 years the loan balance was $48,640.07. I refinanced at 80%, ( $78,400 ), gave me a net after paying off the 1st mortgage of $29,760 minus closing cost left me with $28,800. I purchase 2 single family houses with that money. 

SO if you are not in a hurry then take your time and really think about where to go next. I would try to find sellers that will give you terms. I truly believe this is the new trend over the next 5 years and I really see it become the way to buy properties, with all the new regulations  the banks are going thru.

Mike Sedlacek, Real Estate Agent in VA (#0225223133)
(757) 405-7336

@Jacob Edmond I would refinance and pull $20k cash-out (if it appraises for $160k), while keeping your LTV at 75%. By keeping your LTV at 75%, will give you the option to go and buy a new primary, at anytime, as long as you get an appraisal with a "rental analysis". The appraisal on the current primary would be done concurrently with the new home purchase appraisal. The bank will take 75% (to factor for vacancy and maintenance) of the potential rent forecast in your old primary, and credit that as additional income for your qualification on your new primary.

For example, if the appraiser pulls rental comps around your house and finds the average monthly rent is $1200/mnth. The bank will take that $1200 x .75 = $900 additional monthly income you will be credited with for qualification on the new purchase.

You definitely want to get out of the mortgage insurance if this is a newer FHA loan. As of 2013, FHA loans that put less than 10% down must pay mortgage insurance FOR THE LIFE OF THE LOAN! Doesn't matter if you pay down the principal to 78% LTV.

You only need to live in the residence for 2 out of the last 5 years to qualify for no capital gains tax. This means you can live in it a year while fixing it up, rent it out, and find the next project. Move into another live in flip and fix it up for a year, rent it out and move onto the next one. At anytime in the first five years, you could move back to the original house for one more year and still get the Cap Gains Exemption.

I'm a believer in keeping your momentum going and utilizing rock bottom interest rates. 5 years from now, you may decide to just do a 1031 exchange on the original house, anyways, which will still allow you to avoid paying any immediate taxes. Best to leave yourself available for multiple options. 

You do have one guarantee by staying in the house for the next 2 years...you will not be able to jump on any great opportunities. Time Value of Money my friend ;)

Jesse Hinaman, Lender in CA (#NMLS 1411475)
(916) 934-3457
@Jacob Edmond  After 6 months seasoning, the lender will do a new appraisal any case. If you refi to a conventional then yes you would save on PMI, but the rate will not be as favorable. With the crazy Fed decisions at hand, I would recommend you stay away for a HELOC, so you don't feel the pain of rate movement.

A good mortgage banker should work with you to help you evaluate the options.

Upen Patel, Mortgage Banker
Federal NMLS# 1374243
Upen Patel, Lender in (#National Lender NMLS 1374243)
(571) 331-5161

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