Cashout refi on Primary Residence to payoff rental mortgage

11 Replies

Hey Friends, I have a 450k loan on my primary residence (currently at 3.5% for 30 years fixed). I can get 2.625℅ for 7/1 ARM. Zero closing cost. More options:

- If I pay 1000 dollars in closing then rate becomes 2.5℅

- My rental has interest rate of 4.625%@30 years fixed. Loan amount is 116k. I can take 116k cashout (still get same rate)  during primary residence refinance and payoff rental and save 2℅ interest. 

Any thoughts/suggestions?

Vinay,

I don't think it is a terrible way to go.  I would not throw the $1000 option into play though.  Not enough of a savings for anyone to get excited about.

Overall sounds like a good plan since there are no closing cost involved.

Jim Sakalis

I would offer the suggestion of doing a heloc instead to take the money out and pay off the rental. The interest rate may be higher 2.65% arm but with a suggestion on how you pay that heloc you could have it completely paid off in 5 years or less using the P.I.L.L method. If you haven't heard if it, check it out on YouTube. Michael Lush also calls it replacing your mortgage.

It may not be the right formula for everyone but it's definitely worth looking in to before making a decision.

Happy Investing...

P.S.- The method is working for me!

The question I ask myself is why wouldn't I...

Reducing debt, increasing net profits and through a line of credit, the more you pay back the more you have to use again. By using a heloc as my new checking account it allows me to pay off the debt completely without having to pay 2 times the amount borrowed in the forum of interest. Plus the money is at your fingertips whenever you need it without having to pay high closing costs to refinance and having to go through the hassle and paperwork of applying for a refi every time you need cash.

For me and my direction of investing, a line of credit works better than a loan. Nothing against loans because I've had both, lines of credit and loans. I simply prefer a line of credit.

Interesting, i am in the process of doing the exact same thing, cash out refi 7/1 arm at 2.625 to buy a rental.

Heloc rates are in the 4's, if this is a buy and hold property in my mind heloc would make no sense as it would lower cashflow.

Unless I'm missing something here.

The only downside I see here, is that you are taking personal risk on your primary. If the rental lost value for whatever reason, you could walk away and not have impact on primary residence.

Btw, which bank is giving you that rate?

@Vinay K. I would recommend against this strategy. In my opinion, you don't want to leverage your primary residence. Using HELOC to flip/buy-refi if fine, but I am off the opinion that each property, primary or rental, should be viewed as its own independent entity and should be able to support it self. I.e. carry its own debt and provide cash flow.

If you move debt from rental to primary, then you might loose sight of the true cash-flow of the rental.

Of course folks will have different opinions. Just my two cents.

Do you plan to move or sell your primary residence within 7 years? Even better, do you think you can pay it off in that time? If so, sounds like a good plan. If not and you plan to keep the properties long term, I don't know why you would trade a low fixed rate for a slightly lower rate ARM. That's just me though, I don't like uncertainty.

Any change on the primary residence (Heloc or refi) will impact your personal DTI. Until you step up to some kind of Commercial Loan, the DTI will be a limiting factor it acquiring future financing.

IMO, a fundamental goal of REI is to not encumber personal assets while using OPM to build your REI protfolio - - even looking for non-recourse loans to protect the nest.

There is no financial reasoning to justify paying off a rental property. The less the equity in the property the better. If you can get money out of your primary use it to buy more properties do not waste it on paying down a rental mortgage.

Contrary to many investors limited knowledge of rental properties having equity in a rental, or even worse, paying off the rental mortgage actually reduces cash flow from the property. If you are a smart investor you know cash is worth more than the measly amount banks are charging for mortgages today. 

Never leave money dead and buried in a rental property, it kills the properties cash flow..

All good points, I think good advice if you live there n places where the 1% 2% rule work. Investor loans at 4% work ok.

If you live on n places were the 1% or 2% rule don't work like so cal, because they are equity plays, then sometimes very low finance rates are the only way to get some cashflow so that you are not losing money monthly.

Let me give you an example, I have a property under contract that is in the money by 50k, it has been a long short sale and during this time comps in the area have taken off. With that said if I got a investment loan for 30 yrs best rates are in the 4's. Even with 30% down cashflow would be $50 month in a $270k property here in so cal. ($1800 rent , $270 HOA)However, cash out refi and I'm in the 2.65%. Now I have $400 cashflow a month plus my principle reduction is better than at 4% investor loan. Additionally, I can treat my 2.65% loan like a 4% loan and use the money I'm saving to prepay , by 7 years I will have paid down a lot more.

If you live in socal, and want to buy properties in B areas to have good renters 1% rule does not work at all. But property appreciating at 6% year.

Point is RE advice is local what works in one part of the county does not in another.

Thanks everyone. Appreciate all the perspectives on this one. 

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