Cash Out Refi on Investment Property for Down Payment

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Cash Out Refi on Investment Property for Down Payment

Jonathan Peters
Member since 2018 · 12 posts · 0 votes

Mods: Sorry for the repost. I originally posted this in the Real Estate Deal Analysis & Advice forum, but I think it better fits here. Please feel free to close the other thread.

Hi All,

My wife and I own an investment property in California. The home was originally purchased as a primary residence with an FHA 30 year mortgage. We have ~20 years left on the mortgage and the fixed rate is 5%. Monthly mortgage is ~$1300 (~$1800 w/ taxes, homeowners insurance, PMI). Our renters pay $1950/month.

We currently rent in NYC and recently had an offer accepted on a condo in Brooklyn. For the funds the down payment on the Brooklyn home, we have been speaking to our mortgage broker about options. He recommended a cash out refi on the California home.

However, the cash out refi we were quoted is at a higher rate (5.5%) given the home is now an investment property. And the monthly payment will go up to ~$2600/month. We'd be pulling out $397,500 and paying down the previous balance on the home of $209k. We'd also pay off our ~$70k of student loan and credit card debt. After closing costs of ~$8k, we'd be left with ~$110k for the down payment on our Brooklyn home.

The 20% down payment on the Brooklyn home is $164k. We have the extra $54k and $30k for closing to toss on top of our cash out for the down payment.

I'm worried about the cash out refi on the California home at a higher rate than we have already. And after reading some posts on here, I'm wondering if we should be considering a HELOC instead. My mortgage broker never brought up that option. Appreciate your input and advice.

Thanks.

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Zack KarpPro Member
Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
8y

The bottom 3 items are not closing costs.  That's interest, taxes, and insurance.  You would pay those one way or another, whether you refi or not.

The actual closing costs are high, way higher than mine.  But I'm not licensed in CA, so I can't help.  But @Chris Mason is a CA lender and fellow BP member.  He's a straight up dude and he'll tell you flat out if you're getting a good deal or not.

Hope that helps and best of luck!

847-387-5513
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  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    That's not a terrible rate, probably similar to same as the HELOC would be. HELOC would save you some closing costs, but long term that might not matter all that much. I want to say you can convert HELOC into longer term (15 yr) loan, but again think that rates going to be nearly the same.

    Just so you know, cash out and then using that as down payment.... huge pain. I did it and will say... STAY ON TOP OF THE APPRAISERS. They can be a wildcard, mine tried to make get an engineering report for my basement (no cracks, no issues) and I pushed back and got it waived. Had that not happened I'd of spent ton of point less money and I had a 30 day close so I was more limited by time.

    1Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y
    @Matt K. Thanks for sharing your experience and words of caution. I too am on a tight timeline, as our offer on the Brooklyn home is accepted, so we need to get the cash out refi (or HELOC) on the California home closed ASAP to put the down payment on the Brooklyn home. It sounds like, from your point of view, we're not in a terrible spot with the cash out refi when weighing against the HELOC. Is a HELOC only for shorter terms than a mortgage? If that's the case, then I think the cash out refi is better for us since it'll kick off a new 30 year term.
    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    Easiest way to think of HELOC is a credit card (tied to the equity of your house). If you were going to get a line and then use it to say buy house, fix it, cash out refi, then rinse and repeat it'd make sense.

    Another thing to consider, is you'd have two payments for that property. You'd have the mortgage, then the HELOC payment each month. If it was me, I'd probably do a new loan to make it simple.

    2Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y
    @Matt K. Ok, thank you. I'll continue moving forward on the cash out refi to get that done. I do plan to use the cash for that for my down payment, but I'll keep that to myself for the time being.
    0Reply
  • Ian Kee
    Investor · Milwaukee, WI · Member since 2015 · 130 posts · 60 votes
    8y

    HELOCs are awesome because they are revolving and offer a lot more flexibility than a mortgage.

    0Reply
  • Zack KarpPro Member
    Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
    8y

    @Jonathan Peters heloc's are an adjustable rate.  In an increasing rate environment, where the Fed has said there will be multiple rate increases this year and next, take that 5.5% 30 yr fixed rate and run and don't look back.

    And btw, your closing costs should only be like $2K-$3K max.  You are probably lumping in escrows, which are not a cost.  Unless you really are paying $8K in costs, and if so, find a new loan officer.

    Hope that helps!

    847-387-5513
    1Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y
    @Zack Karp Thanks. This is really helpful. I may be high on my closing cost estimate. I will look at the disclosures and make sure they're not that high. I will be moving forward on the 5.5% cash out refi. Thanks for all the help.
    0Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y

    So, the closing costs are pretty high on this cash out refi. Am I getting hosed?

    The costs are

    -$1740 origination charges

    -$650 appraisal fee

    -$65 credit report

    -$150 title endorsement fee

    -$695 title escrow fee

    -$450 lenders title insurance

    -$50 title messenger fee

    -$300 title notary fee

    -$50 title wire

    -$425 recording fees & taxes

    -$933 prepaids (insurance, property taxes, interest)

    -$1043 homeowners insurance

    -$1792 property taxes

    TOTAL CLOSING COSTS: $8,343

    0Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y
    @Zack Karp
    0Reply
  • Zack KarpPro Member
    Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
    8y

    The bottom 3 items are not closing costs.  That's interest, taxes, and insurance.  You would pay those one way or another, whether you refi or not.

    The actual closing costs are high, way higher than mine.  But I'm not licensed in CA, so I can't help.  But @Chris Mason is a CA lender and fellow BP member.  He's a straight up dude and he'll tell you flat out if you're getting a good deal or not.

    Hope that helps and best of luck!

    847-387-5513
    4Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y
    @Zack Karp Thanks, Zack. Ok, so if we take out the last three items, the closing costs are still in the high threes. I'd love to get some perspective from @Chris Mason.
    0Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y
    @Jonathan Peters I said high threes, but really mid fours without the last 3 items
    0Reply
  • Alex Furini
    Architect · Cary, NC · Member since 2018 · 96 posts · 63 votes
    8y

    -Reposting here as I responded to the same post on a different thread-

    Everyones posts here are spot on.

    Heloc's are great for down payments on properties. In my opinion they are one of the only sources of "borrowed" funds that a bank will allow on a mortgage application without having to jump through lots of hoops. I have personally done this for a property in Brooklyn.

    That being said most banks do not offer Heloc's on Investment Properties. Rather they would need to be on an owner occupied property. You would need to do some research (Ive seen a thread on BP discussing which banks offer these type).

    I personally did not want to do a cash out Refi, as I planned on paying off the Heloc Downpayment funds much faster than the 30 year refi note. However, a refi CAN have a set interest rate, while a Heloc will most likely have a variable rate. Which FYI, is currently going up. It really depends on what your plans for the future are. Do you you like the security of a fixed payment each month or do you like the freedom of having essentially a large credit card to use for purchases.

    Best of Luck,

    0Reply
  • Jessica G.
    Investor · Dallas, TX · Member since 2014 · 177 posts · 213 votes
    8y

    Can someone help me understand how it makes sense to hold onto a property whose PITI is $2600 (after the refi) but only rents for $1950? Maybe I'm missing something.

    0Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y

    @Jessica G. The way I got my head around it was we have ~$75k in debt between student loans and credit cards. The interest rates on those are higher than what the cash out refi mortgage will be. And the minimum monthly payments add up to over $1k. So using the cash out refi money to wipe out all of our debt leaves us with a hefty chunk of cash for our down payment. And it actually lowers our monthly expenses, even though the PITI is higher than what the renters pay.

    0Reply
  • Jessica G.
    Investor · Dallas, TX · Member since 2014 · 177 posts · 213 votes
    8y

    @Jonathan Peters Gotcha, thanks!

    0Reply
  • Upen PatelPro Member
    Lender · Nationwide Lender · Member since 2015 · 1k+ posts · 814 votes
    8y

    @Jonathan Peters Since you are buying the NYC condo as owner occupied, you can do that with just 5% down. Seams like you already have that. So why are you doing a cash-out refi? Unless your DTI doesn't work with your student loans and MI on the new house, I would recommend not doing the cash-out and do a low down payment of the condo purchase. Of course your current lender loves that you are doing the two loans, but does make sense of you?

    [email protected]571-200-6180
    1Reply
  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y

    @Upen Patel The condo we're purchasing is a 90% financing building, so the minimum we can put down is 10%. We want to put down 20% to keep the monthly payments more manageable. 

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y

    I'd just put 10% down on your condo purchase since you have that.  Put the $75k of debt on Dave Ramsey's debt snowball plan and save the $4k+ in CA refi costs.  Your CA loan is a good rate and only has 20 yrs left.  

    You'll be looking at a higher payment for 10 years longer your way, plus the $4k and PITA.  $4k in savings sounds like a couple weeks of freedom to me!  Always ask yourself how much freedom something costs you.  This one decision will cost you 10yrs.  I've never looked up after paying off a mortgage and wished I had 10 yrs left.

    1Reply
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