Hey all! This is my first forum question.
I have about $50k equity in my primary residence, and was wondering if it would be advisable to use that equity to get my first investment home.
If so, what route should I take: Home Equity Loan, HELOC, cash out refi??? Is there another option I'm missing (I'm about as green as they come, so forgive my ignorance).
Welcome to the forums! Don't let this be your last question, the forums are a great resource.
Pulling the equity out of your house will depend on the current value of your house. Typically you can only pull out up to 80% LTV (loan-to-value), so if your house is worth $100,000 you could pull out $30,000 in equity ($100,000 - 20%=$80,000 - $50,000 loan = $30,000). If your house is worth $200,000 then the 80% value would be $160,000, meaning you could only pull out $10,000 in equity. So basically if your house is worth $250,000 or more then you have $50,000 in equity but you probably can't pull it out. I hope this makes sense.
That being said and assuming you have equity you can actually pull out and use, my recommendation would be to get a HELOC. If you get a home equity loan or cash-out refi then you'll be getting the money, even if you don't know how much you'll need, and you'll have a monthly payment every month. With a HELOC, it's like a credit card. You have access to the funds when you need them but if you don't then you're not borrowing anything and you don't have a payment. The only way I would recommend a cash-out refi would be if you would be able to get a much lower interest rate than you currently have on your home, as you'll be getting a new 15 or 30-year loan on your property. Be aware that you'll also be charged closing costs for the new loan which will most likely be a few thousand dollars.
Best of luck!
@Eric Black I'm confused by the equation you gave. The concept that $50k in equity is a higher percentage of total value in a $100k home than in a $200k home makes perfect sense. But the equation applied to the $200k home would go as follows [according to my utter lack of understanding]:
$200,000 - 20% = $160,000 - $50,000 loan = $110,000??? What did I miss, or what don't I understand?
@Jeff Rossman Sorry for the confusion.
You stated you have $50,000 in equity in the home so I was using that number just for the equity. If your house is worth $100,000 and you have $50k in equity then that would mean your loan is about $50k. If your house is worth $200,000 and you have $50k in equity then that means your loan amount is about $150,000. If your house is worth $200,000 and you have a $50,000 loan then you have $150,000 in equity which is a whole different story. Again, the only number I had to go on was the $50,000 in equity you stated you have.
If you can give some additional numbers, such as what you think the current value of your house is and what your approximately current loan balance is then we can use real numbers.
Does that help?
Totally get it now. My home is valued at approx. $140,000 (Zillow), we owe about $89,000 on our loan.
I really appreciate your help and patience. How did you finance your first deal, @Eric?
So with those numbers, and I wouldn't put much trust in Zillow, your 80% LTV is $112,000 ($140,000 - 20%). Since you have a loan of $89,000 you have to subtract that from the $112,000 which would leave you with about $23,000 of equity that you would be able to pull out.
Again, these numbers are based on what you've provided and on general guidelines. You may be able to find a small local bank who will allow you to pull out more equity. I would start calling around to see what different banks will offer.
We had a good amount of money in savings so we did traditional financing. We have actually done traditional financing on all of our properties so far (5). We like using the leverage.
Cheers and keep asking questions, it's how we all learn!
Jeff, to choose the correct product you would also need to decide what sort of investment you plan on doing. If short term fix and flips, a HELOC would work much better, if long term rentals, a home equity cash out would work better. Of course if you have a large supply of fixer homes coming through the pipeline, a cash out loan might work too. I too am applying for a HELOC right now to fund more flips so been through a similar decision making process.
Thanks for the advice @CK Hwang , I am looking at investing in a rental property - so, long term. I am mostly just trying to explore all my financing options for my first deal.
Hi Jeff, yes, for a long term rental, you might want to try cash out financing in that case.
I've been talking to a mortgage broker Scott Storace. I'm not sure if they do lending in AZ, but perhaps you might want to try giving him a call. I like that his company lends on homes held in an LLC and can do cash out financing for home owners one day after the new home is acquired without a seasoning requirement.
PrimeLending, a PlainsCapital Company4 Venture, Suite 100
Irvine, CA 92618
Mobile: (949) 973-0141
Mobile: (775) 781-5464
Fax: (866) 893-7822
If the cash is used for a long term buy and hold it would definitely be better in not all but most cases to use fixed 30 year financing so you can control your "downside," cash flow risk and only focus on the upside which eliminates near 50% of the risk scenario.
Heloc's might be a bit lower than a 30 year fixed if the LTV is less than 80 % of your property's market value, but the benefit of the fixed terms far outweighs the volatility and lower variable rate of the HELOC.
HELOC can be great if you're doing flips since the capital can be replenished quickly as you can churn your capital in and out multiple times a year and the interest rate risk of a HELOC is not nearly as high when used in this manner. If rates spike up and you pay back your borrowed portion within 2-3 months your risk to the market was fractional/marginal as opposed to a buy and hold your risk and interest rate sensitivity to the market is prolonged and can eat away at the spread you're earning on the buy and hold.
HELOC will save you thousands over a refi unless your rate will be much lower (2-4% lower) after the refi. HELOCs are often "free" to get and you only use what you need when you need it. That way you aren't paying interest on money that you haven't put to use yet.
Use the Heloc as a short term loan to help make up any deficiencies for your 20% down-payment. For example say you have 15k and find a great deal that you need an extra 5-10k... use the heloc to make up the difference.
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