Cash-out Refinance for next Downpayment???

20 Replies

Hey everyone. I'm looking for some advice on my next deal. Currently, I own one rental property which I purchased using a conventional mortgage with 20% down. That property is currently rented out.

I'm looking to buy my next rental property, but obviously my first purchase absorbed most of my liquid cash (aside from emergency reserves which I plan to hold onto). I do, however, have about $65k of equity in my primary residence. Although it's not enough money to fund the entire purchase, pulling out that equity would provide more than enough for a downpayment and minor rehab on my next property. That's all assuming I can lock in a lender that would be willing to count that cash as usable funds. I'm looking to buy either a SFR or a duplex in the neighborhood of $140-$170k.

After speaking with a few lenders and hearing the terms, I decided that a HELOC wouldn't be the best loan for my plan of action. I initially inquired about a home equity loan to pull out some cash. After further discussion, I found out that since I have a VA loan on my home, I could also do a cash-out refinance for up to 100% LTV. I am currently 3 years into a 30 year mortgage at a fixed 3.25%.

My options for withdrawing $50k of equity would be the following:

- 15-year Home Equity Loan @5.5% which amounts to $408/mo

- 30-year cash out refi at 3.375% which would add $180/mo P&I to my current mortgage payment (plus the 3 year extension)

My DTI is currently 30% and my credit score fluctuates between 780-800. Not including the rental income it would bring in, acquiring this property would put my DTI at around 36%.

I have a few questions to go along with this:

1. First of all, are there lenders out there who will view this cash as a legitimate source for a downpayment?

2. If I can't translate this cash directly to a downpayment, could I deposit it into my account for a few months to let it "season" before seeking a conventional loan?

3. Which option would you recommend for extracting equity? On one hand I would have the loan paid off in 15 years and my original loan would remain untouched, however the interest is 2 points higher. On the other hand, my primary mortgage rate would increase very slightly and my loan term would get extended by 3 years, but my monthly additional payment would be significantly smaller. This would make it much more likely that my rental income would cover both my mortgage payment and the additional payment incurred by the refi.

4. Should I just take out the minimum amount of money needed to fund the downpayment? Or with money coming so cheap currently, should I take out a little extra to put towards future investments right now?

5. Any other pros or cons you could point out with using this method of funding would be appreciated. I'm all ears and have a very open mind in regards to this. If you've used a similar strategy in the past, I'd love to hear your lessons learned.

Thanks for hanging with me through this mini novel. Looking forward to hearing from you all!

@Steve Borodin

Cash out VA refi up to 100% all day long. No question about it. Yes you can use that as down payment for another property. No seasoning needed. Whatever you don't need or use right away, stick it into a safe liquid investment or buy 2 properties with it. Use that super cheap tax deductible money to your advantage. No brainer. Make sure you use a lender that has your best interests in mind on how to structure all of this. And thank you for your service.

Seems like a no-brainer to me.... The cash-out refi for sure!!! Adds a smaller amount to your mortgage payment, allowing you to keep more cash-flow from your rental(s). Lower interest. More time to pay off. What's not to love about all that?!

@Zack Karp

Thanks a lot for the advice. In your experience would you agree that a Home Equity Loan is a better way to go than a HELOC when using it for a downpayment? My logic was primarily to avoid the variable rates. It also seems like it would be too easy to make only the interest only payments for the term, which would leave you with the full principal still to pay off or roll into a new mortgage at the end of the draw period.

@Patsy Waldron  

I think I have to agree. The other question I have to ask myself if I pull out the full amount is whether I would rather get one solid B+ property or two C type properties with the funds. 

@Steve Borodin

Don't do a home equity loan or heloc. Refinance your primary mortgage, VA cash out refi, into a new 30 year fixed. That will be your best terms. Home Equity fixed rates are higher, and helocs can be beneficial, but yes they are adjustable rates, and most people get them because they can't do cash out on a conventional loan over 80% LTV. But with VA, you have an option that you should take advantage of, being able to cash out to 100% and get a nice low fixed rate. Like I said, no brainer. And if you're concerned with "going back to 30 years", then you can always pay extra. However, leveraging that money is a better use for an investor rather than paying it back into a mortgage.

@Zack Karp
That's exactly the kind of reassurance I was looking for. Thanks a lot for the solid advice!

@Zack Karp , @Steve Borodin this was such great feedback thank you for sharing. I do have one question after the refinance how long does it take to apply for a mortgage, get approved and use the refi money as down payment. Does a bank question that whole process or is something commonly done?

The refinance will probably show up on your credit report and the lender will most likely require you to explain the loan through disclosure if it's within ~120 days of applying for a mortgage for another rental (after cashing out).

The 100% LTV for a 30 year fixed @ 3.4 is amazing. The fact that you're below 4.5 and getting cash is awesome. Just realize that you'll need to include the increased principal and interest in your CF calculation(s) (possibly increased taxes too if the county/city gets wind of the new appraisal/mortgage amount).

Cheap money is great! 

@Wendy Gomez

There is no waiting for that. In fact, both can happen simultaneously. I actually have a few like that going on right now. As long as the refi closes first and funds (on a primary refi there is a 3-day rescission period), those proceeds are immediately available for use of down payment on another property. We just use the Closing Disclosure (formerly the HUD-1) as the paper trail to source it. Many lenders and especially larger banks try to over-complicate things and/or have overlays, but the actual guidelines don't require any seasoning of those funds. Hope that helps!

@Zack Karp wow I cant believe this is actually possible. I guess I just have to get out of my own head and put aside the limiting beliefs. I'm just afraid of too much debt but who cares when its good debt. So in other words if I refi my properties and I can borrow 100k I can apply for mortgages and purchase a few properties as long as my income and investments can afford the loans?

@Wendy Gomez

That's exactly right. :)  As long as you qualify, no need to wait.

PM me if you need a referral to a good loan officer in NY that understands investors and how to structure the deals properly.

Best of luck!

@Wendy Gomez

Yes. If your DTI is good they will lend to you. What you would do is wait until you found a property and then close the cash-out refinance and second property at the same time. Then you would have left over cash at closing to buy a 3rd down the road.

My lender was willing to cash out on my personal residence, my rental to and close on another property all at the same time.

@Zack Karp , @Justin Fox I'm learning so much from this conversation I truly appreciate all of the detailed explanation you are both providing. I've been stuck owning three properties for the past three years but I don't have any more cash and I don't know what to do until recently I learned about the Refinancing. @Zack Karp I will PM you for that info that would be extremely helpful. @Justin Fox thank you I know that 100k seems like a lot of money but in my market I can probably purchase three properties with 20% down payments. I will talk to my realtor about finding those and the cashing out on the refi so I don't have to start paying interest until I pull that out. thank you Justin this is going to be extrememly helpful.

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BP truly is a great place to learn/network/grow your knowledge in real estate. I will have similar questions in the future once I purchase my primary residence and can't wait to learn from the members here.

Hello and welcome to this site!  If it will return you goodn cash floeow I would tend keep it and refinance it and use the proceeds to borrow against other good deals. If your new projects are promising and look good on paper  would take on more debt to do it.  Long term investments are typical with rental units.  If you are having no trouble with your existing projects don't sell, refinance, and keep on investing in flips or new rental units that will give you more cash flow or flipping profit.  Try to go by your goals and that extra effort usually works out.  

Remember that your ultimate goals are what directs you.  Know the neighberhood, Chamber of Commerce future plans.  Stay in the market you are in. Just do what is average in that neighberhood. Having longer term debt will pay off and remember unless the new president can hurt that you can always walk away.  If you are holding on to long term debt and keep that positive cash even in a down-turned market,  Good luck to you!

Originally posted by @Justin Young :

BP truly is a great place to learn/network/grow your knowledge in real estate. I will have similar questions in the future once I purchase my primary residence and can't wait to learn from the members here.

Once you know that the KEY to getting refinancing QUICKER is to obtain as much ADDITIONAL equity on day one (on top of your actual deposit) ie. only look for bargain-priced Investments as your primary rather than becoming emotionally attached to it, you'll be well on your way! Cheers!...

@Zack Karp hi hope all is well, can you send over info for your NY lender. Thank you so much

Just remember that the appraisal can kill the deal should the comps he choose not come back where you expect them. I have a duplex I bought 3 years ago for 180k and I owe 127k. Comps have sold anywhere from 229k to 288k in the past 5 months. The appraiser came back with comps from 1 year ago to justify his appraisal value of only 186k.
Needless to say that killed my deal and I'm out $590 for the fee. So although he was wrong, I'm going to wait a little while to try again and have my realtor pay attention to comps

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