Bank Refi Existing Loan & payoff 2nd pos. Creative Private Loan

3 Replies

I've got a small apartment building that I would like to refinance. Its worth about $425K and I've got $40K left on the bank loan that matures next year. I would like $265K so that I can payoff the balance and build a duplex on some other property that I have. Bank says they won't refinance and give me cash out if the money is going to be used on another real estate project other than the property that is securing the loan, but they are willing to refinance and payoff a 1st and 2nd loan. So my thought was to write up a loan agreement between my Dad for the balance of $225K for a 2nd position loan on my apartment building, then have the bank pay off my 1st mortgage and my Dad the 2nd, in which he could then give me the $225K to build the duplex. Am I breaking any laws with this creative financing? See any IRS problems?

If the Bank is "willing to refinance and payoff a 1st and 2nd loan" (using BOTH properties as security), what's the problem?

If you believe in the project, paying a higher interest rate on the 2nd should still be worth it, right? If you're able to add your Dad to the Loan/s in order to get a lower interest rate, then, why not? It just means that your Dad is then on the hook too, and would become a Joint Venture Partner.

I don't foresee any IRS problems, unless you were thinking of PRETENDING to the bank that you had mysteriously come across your needed deposit for your next project as a cash windfall, without telling them that you had an OBLIGATION to pay it back!

Banks take mortgage fraud VERY seriously! Just: don't do it!

I may have misinterpreted your situation, in which case, just ignore me. Welcome to BP...

Brent, 

Thanks for the reply. The banks stance is they are unwilling to refinance and do cash out if it is for another real estate deal. 

Yes I could always pay a higher interest rate and get money but I figure the point is to pay the lowest interest rate legally possible. 

My intention would be to tell the bank that I do have to pay off the 2nd position loan which my Dad would have and in that way be able to get the full amount that I need. 

@Wayne Scheler , "The banks stance is they are unwilling to refinance and do cash out if it is for another real estate deal"? That doesn't really make sense to me.

It reads as though the bank WOULD be willing to refinance ($265k) under their normal guidelines (because you'd still have 25%+ equity in it), so what's their beef?

Isn't re-investing Bank-offered cash-out into other RE deals the very reason why EVERY good RE investor refinances?

My point is: whatever amount they WILL grant you (regardless of your intended purpose, be it holiday or whatever), that amount CAN be used as your deposit for your next project. Your Dad's loan to you would then effectively be a FIRST position loan on your new project (and hopefully a suitably low interest rate can be struck with him). Cheers...

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