Refi primary residence for investment for payment

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Refi primary residence for investment for payment

Sean Starkey
Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes

How many out there have refinanced their primary residence to get a down payment for their investment property? We have had our house since January of 2021. Homes around us are selling for low 900s and we have 647k remaining to pay on a conventional fixed loan. We got a great deal on the house. Do we refinance to get our down payment to start our investment journey who else did?

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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y

@Sean Starkey you won't be able to refinance any sooner than one year, most likely, but that is only a couple months away. Here are some things to be aware of:

1. You will incur new closing costs for appraisal and loan fees. That will be $2000 or more. They may let you finance into the loan, but it is still an expense.

2. Cash out refinance will probably require you to leave 20% equity in the property. Assuming $900K value, that is $720K loan amount. You are probably looking at around $70K cash out.

3. You will pay higher interest rate than a non-cash out refinance. Maybe 0.125% to 0.5% more.

4. Payment will likely go up, but depends on current rate and terms of course. At 3.8% for 30 years, $70K will cost you $325 per month.

5. Keep in mind that using a financed down payment means your rental property will be essentially 100% financed. You will need to find a good deal to make sure you are not under water each month on payment versus income. Many investment properties do not cash flow when 100% financed.

I am not trying to talk you out of doing this, but make sure you invest that $70K wisely, so it isn't just an extra monthly burden.

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  • Kamil Baldyga
    Real Estate Agent · Fayetteville, NC · Member since 2020 · 86 posts · 91 votes
    4y

    Hey Sean! That is definitely an option. I would recommend checking if your bank, or any other bank, will allow you to do a HELOC or do cross collateralization on the equity in your home first. That way you can maintain that equity in your home but continue to leverage it for other properties.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    4y

    @Sean Starkey you won't be able to refinance any sooner than one year, most likely, but that is only a couple months away. Here are some things to be aware of:

    1. You will incur new closing costs for appraisal and loan fees. That will be $2000 or more. They may let you finance into the loan, but it is still an expense.

    2. Cash out refinance will probably require you to leave 20% equity in the property. Assuming $900K value, that is $720K loan amount. You are probably looking at around $70K cash out.

    3. You will pay higher interest rate than a non-cash out refinance. Maybe 0.125% to 0.5% more.

    4. Payment will likely go up, but depends on current rate and terms of course. At 3.8% for 30 years, $70K will cost you $325 per month.

    5. Keep in mind that using a financed down payment means your rental property will be essentially 100% financed. You will need to find a good deal to make sure you are not under water each month on payment versus income. Many investment properties do not cash flow when 100% financed.

    I am not trying to talk you out of doing this, but make sure you invest that $70K wisely, so it isn't just an extra monthly burden.

    8Reply
  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Joe Splitrock

    Thank you so much for the advice! I need to find a different way to get into investing it sounds like. Maybe just saving up for a year to be able to put cash down because I would like to use the BRRRR route. I am learning about this method right now using David Greene's book. Any recommendations on how I should get the first property? I want to get a duplex and start in multifamily

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  • Jeff Shumway
    Lender · Tampa, FL · Member since 2020 · 182 posts · 90 votes
    4y

    Hey Sean, this is something I see a lot of my clients do. Cash out refinance rates on a primary residence will always be cheaper than a HELOC or cash out refinance rates on an investment property. It's a quick way to get started as opposed to waiting and saving the entire down payment.

    1Reply
  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Jeff Shumway

    Hi Jeff so you're saying I should take money out of the house? Talk to me about what happens when you refinance. Do you just get a lump some of money and your mortgage rises and interest rate rises? And also I need to pay closing costs and hopefully no points. A better question is what exactly happens when you refinance

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  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Kamil Baldyga

    Hu Kamil! So how do I leverage it for other properties and I hear HELOC has variable rates and has high interest. How do I get out of that quick to pay it off? Or is that how it works?

    0Reply
  • Jeff Shumway
    Lender · Tampa, FL · Member since 2020 · 182 posts · 90 votes
    4y

    It can be a really good way to get started. Like Joe mentioned, make sure the deal you purchase will make enough money every month to cover your new primary mortgage payment as well as the mortgage on the actual investment property. 

    When you do a cash out refinance, you are basically paying off the existing mortgage on your home and replacing it with a bigger mortgage (up to 80% of the value of your home.) If your home is worth 900K x 80% = new mortgage of $720K so your payment will likely increase slightly. This will partially depend on the interest rate- if you are able to lower the new rate from your current rate, it will offset the increase in loan size. 

    You will likely get around 60-70K cash back after paying off the old mortgage, closing costs, and any potential rate buydown. At closing you receive a lump sum payment. As a general rule of thumb, closing costs and title fees run 2-3% of the loan amount. Most closing costs are not actually charged by the lender. Lenders typically charge a small fee just to pay their staff but most of the closing costs actually come from the title company and some of the fees are state mandated as well. So a "no closing cost" refinance doesn't really exist. Any closing costs are just deducted from the proceeds of the refinance so the only thing out of pocket is the appraisal (usually $750-$900 depending). 

    The process is similar to when you purchase the home. A lender will review your credit, income, and assets to make sure you qualify for the new mortgage. You will likely have to have an appraisal done on the property as well to certify the value. If all goes well, you should be able to have cash in hand in about 30 days. 

    1Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @Sean Starkey I've used cash-out refinancing to purchase two of our investment properties. As others have said, the process is very similar to when you took out your initial loan. You get pre-approval, do an appraisal, and close with a title company with standard closing costs. You are simply replacing your current loan with a new loan, and the difference (after closing expenses) is what you receive at closing. Just look at the costs of the refinance and ask yourself "can I make MORE money with the refinance than it COSTS?" If the answer is yes, then it is a great option to consider. The money is also tax-free as it is debt, so it isn't income. Hope this helps!

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  • Carlos Villalta
    Wholesaler · San Bernardino, CA · Member since 2015 · 84 posts · 15 votes
    4y

    @Sean Starkey i plan on doing the same thing. Fix n flips a few times until I can rent out @ %100 cash flow. With $70k I'll get more bang for my buck. Invest in "affordable" single fam. Even if it means looking into a different state. I'm not to fond of using "other people's money" peace of mind is priceless

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    4y
    Originally posted by @Sean Starkey:

    @Joe Splitrock

    Thank you so much for the advice! I need to find a different way to get into investing it sounds like. Maybe just saving up for a year to be able to put cash down because I would like to use the BRRRR route. I am learning about this method right now using David Greene's book. Any recommendations on how I should get the first property? I want to get a duplex and start in multifamily

     There is only three ways to get a down payment:

    1. Borrow

    2. Save

    3. Partner

    The advantage of BRRRR is you are creating value (equity). Here is an example. Instead of buying a property worth $100K and putting $20K down payment, you are buying a property worth $60K, spending $20K to rehab and end up with a property worth $100K. You end up with $80K invested and $100K of value, so your 20% equity is "created" instead of being paid. It is great you are reading David's book, because there is much more too it than what I can write in a quick response. The key of BRRRR is buying a property under value with unlocked potential. That usually means you are buying distressed properties.

    1Reply
  • Erandi Lechuga
    Rental Property Investor · Denver, CO · Member since 2021 · 15 posts · 4 votes
    4y

    @Jeff Shumway

    Since refi'ing is so similar to when you first purchase the home, is it recommended you work with an agent? Or does one simply go to a lender?

    0Reply
  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Jeff Shumway

    When you say to make sure that the deal I purchase makes enough money every month to cover my primary mortgage and mortgage of actual investment what do you actually mean? Our current mortgage is 2.75% rate and 3700 per month.

    Thanks!

    0Reply
  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Erandi Lechuga

    Great question! I was curious if we need an agent to refi also!

    0Reply
  • Erandi Lechuga
    Rental Property Investor · Denver, CO · Member since 2021 · 15 posts · 4 votes
    4y

    @Sean Starkey

    I am in the same boat you are! Hoping to refi my primary residence to make down payment on a multi family property. Glad I am not the only one with these questions! 😁

    0Reply
  • Jeff Shumway
    Lender · Tampa, FL · Member since 2020 · 182 posts · 90 votes
    4y

    You do not need a realtor to refinance your home. Realtors are only for purchasing a home. 

    @Sean Starkey the mortgage payment for your primary will increase. Let's say it goes up by $100 (just an example for easy math). Let's say when you finance the investment property, the total mortgage payment (principal, interest taxes and insurance) is $1000. The true cost of loans you are repaying every month is $1100. It's $100 to cover the cost of the primary residence mortgage you refinanced as well as the $1000 actual mortgage tied to the investment property. You will want to make sure the rental makes enough money every month to cover the $1100 in mortgage payments plus any additional expenses (capex etc.)

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    I think you’re going to face a hidden cost. I don’t think you’re going to find a cash out refi at 2.75%. Let’s pretend you find one at only 3%.

    You take out $46k ($720k-$674k balance) and it costs $2k rolled in to the new loan. 

    So you go from $674k at 2.75% = $2751/mo total of $316k in interest to…

    $722k at 3% = $3044/mo total of $373k in interest. 

    So you get to borrow $46k for $300/mo and pay $57k to borrow it for a total of $103k. 

    You’re effectively paying about 6.5% to borrow. If you can get a 3% cash out refi. 

    1Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    You do not need an agent to refinance, you do need to use a pen to add in all the possible costs.

    1. When you increase the loan on your primary the cash out portion is not tax deductible in the same way as it was when you bought as the money is not going in to improve that property.

    2. No matter the size of the new loan you have flat fees: underwriting, appraisal, plus title and escrow, recording, notary the same as when you started the loan BUT you do not have any seller contributions to subsidise part of the title and escrow/attorney costs. You get a lump sum and start paying right away. You have to full doc qualify to get the best rates. 

    3. Markets are at new highs. You need to find a deal that you can manage and get operational fast as you are paying for the costs daily in your refinance loan. Will you be able to close on a property that is cash positive and can you withstand any storm to come? (things happen: job loss, bad tenants, disaster, bad people...) Do you have the knowledge or team ready to help you with honest knowledge?  In today's current supply chain mess- can you get the pieces/parts you need to get finished fast?

    Buy location it's the piece you cannot change. 

    0Reply
  • Matthew Armstrong
    Member since 2018 · 8 posts · 2 votes
    4y

    Hi All,

    I am currently going through a cash-out refi for this exact purpose. I am taking the equity out of my primary residence with plans to invest the money gained. Below is my real life example and analysis.

    Current Mortgage - 30 yr

    Loan Balance: $204,000

    Monthly Mortgage (PITI): $1,335

    Interest Rate: 3.25%

    Total interest paid over the life of the loan: $119,015

    New Mortgage - 30 yr

    Projected Home Value (Still needs to be appraised): 370,000

    Loan Balance (80% LTV): $296,000

    Monthly Mortgage (PITI): $1,750

    Interest Rate: 3.0%

    Total interest paid over the life of the loan: $153,026

    Calculations

    Total Cash in Hand after Refi and closing costs: ($296,000 - $204,000 - $5000 (CC)): $87,000

    Total Mortgage Difference over the life of the loan (12 months X 30 years X $415): $149,400

    Total Interest Difference over the life of the loan ($153,026 - $119,015): $34,011

    Total additional cost of refi for life of the loan ($149,400 + $34,011): $183,411

    Monthly Mortgage (PITI) Difference: $415

    What @Jeff Shumway is saying is the $87,000 gained from the cash-out refi, better be making you at least $415 dollars each month to cover the additional monthly expense difference. Another way to look at it is the $87,000 better make you over $183,411 over the 30 year period. Now my goal is to take the money and do private lending which will give me an expected return of 9.5% every month. That will be (($87,000 X .095) / 12) $688.75, which will give me an extra $273.75 every month. Then if you take that a step further and you made 9.5% on that $87,000 over the life of the loan without ever contributing another dime that would come out to be $1,324,167.21.

    Total difference over 30 years($1,324,167.21 - $183,411): $1,140,756!!

    1Reply
  • Ana Garcia
    CPA · Miami, FL · Member since 2015 · 132 posts · 83 votes
    4y

    @Sean Starkey I say yes, do it. Just make sure the investment property pays for its own expenses its mortgage, and the additional mortgage it will bring to your home after doing the cashout refi.

    Good luck!

    0Reply
  • Jordan Woolf
    Flipper/Rehabber · Huntsville, AL · Member since 2019 · 117 posts · 57 votes
    4y

    @Sean Starkey I have used a heloc from my primary residence to finance the down payment on a flip and I am about to do it again for a BRRR. With the heloc route I was able to access more of my equity vs refinancing.

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    4y

    You'll need to utilize interest tracing to deduct the interest of that Heloc/Refi funds against the rental income of the rental it is used to purchase. 

    It's best to have the funds go straight into a clean un-used bank account/ don't intermix with your primary checking account. 

    If the funds are split between more than one deal track wht amount goes to each, as you'll deduct a proportionate allocation of interest on each as well.

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  • Greg ParkerBusiness Member
    Realtor, Contractor, Property Manager · Montgomery AL and Kowaliga, AL · Member since 2017 · 669 posts · 536 votes
    4y

    @Sean Starkey Check around with local banks. Some of them have some great HELOC programs. The last time I needed 50K to finish a project, I got a HELOC on my residence for 6 months. At the end of the day, the interest was only $400. My local credit union did a free appraisal on my house, and there were zero closing costs if I kept the money out for 6 months. And, I didn't have to get all 50 at once. I just drew on the available amount as I needed it.

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  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Matthew Armstrong

    Wow Matt! Thank you for that amazing calculation and all the time you took to do that! I need to keep reading these responses and yours especially until it makes complete sense to me because this is all new to me. I want to get great at the math part because that is how I will be able to analyze and know what I am doing!

    0Reply
  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Greg Parker

    Greg can you describe what you did little more? How do they determine how much you can get from a HELOC? And how much do you pay back? How is that determined? Is it interest and principal or is that the wrong word?

    Thank you I am so new to this sorry but the more questions I ask the better I will get!

    0Reply
  • Sean Starkey
    OP
    Rental Property Investor · Huntington Beach · Member since 2021 · 116 posts · 40 votes
    4y

    @Jordan Woolf

    Ok great good to know. How was your interest rate? Variable? Are most variable? The goal with a HELOC is to pay it off/back as quick as you can right? Do you pay HELOC off with the equity from investment property i plan to buy?

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