Refinance or HELOC?

Question

Ok, I need opinions and advice. Here's the situation: I bought my first home June 2013. Got a great deal, put a lot of cleanup and work into it, and thanks to a hot Portland market I would conservatively estimate the home to be $240k (could be as high as 260k, we are getting like 2% appreciation per month in some areas here).  I owe $144k, so conservative equity over $90k. PMI at $90/month until 2022.

In the next 2-5 years my wife and I would like to move to a different area where we would like our kid to go to school. What is my best strategy, what would you do?  My current thought process is to get an appraisal and setup a HELOC for down payment use. However, I could refinance at the same time, get a slightly lower interest rate (currently 3.875) and drop PMI. But if I happen to find our next home soon, refinance fees would be wasted. I could also keep my current home as a rental, but the numbers wouldn't work well (could rent for 1500-1700 I think). Online calc estimates make me think after refinance my monthly PITI would drop from 1150 to a bit over 1000 with the PMI removal and interest rate reduction.

And for those with key word alerts setup, any recommendations for refinance / HELOC providers in Portland Oregon? And any wholesale guys that might pick up homes is Sandy from time to time, get in touch please :)

Justin Mespelt · Answer

It's the sellers agreeing to the contingency that I would worry about.  I guess I'm just apprehensive about what could go wrong or what we could miss out on by trying to juggle both transactions in a way that allows us to buy a home we like.

Justin Mespelt · Answer

I guess I'm not making sense. If I did a cash out refi, the mortgage on my current home would be locked in for something around 240k. There is no way it would be a cash flowing rental at that PITI. However, if I did a simple refi the locked in PITI would get close to rentable. But the real issue is the access to the equity for use in the next property. I'm looking for the best way to use current equity on a future residence. I guess this is more of a purchasing logistics problem. With a long timeline in mind for my next purchase (2-5 years) do I trust that if I find a house I like I can get them to accept an offer contingent on me selling my current property? Or if I have access to my equity through a HELOC can I use that as a down payment and simply carry two mortgages in case the old home doesn't sale quickly?

How often is a contingency on sale of previous home clause used in home purchase? Would having access to a HELOC help me in finding a below market deal, like a HUD home, other forclosure, a home bought off MLS if I can find a wholesaler/flipper that would want to work with me and possible partner with my financing? I've only ever purchased the home I live in, so the proper methods of moving on to a new home correctly are new to me.

Justin Mespelt · Answer

For clarification, the equity in my current home would be the down payment on the next home. In a hot market wouldn't it be better to be able to put cash down and establish the new mortgage just in case the previous home doesn't sale quickly? An offer that includes a contingency seems to be less preferable to the seller.

And also to clarify, there would be no cash out refi in either scenario. The refi would be to simply remove $90/month PMI and establish a slightly lower interest rate.

Steven Kleppin · Answer

I think the monthly payment difference is a little less than $150/month is what I got out of that.

1) If you're not planning on keeping the 1st property which you don't think the numbers work out... I wouldn't refi or HELOC at all. Why go through all of that for the 2 years you hold onto it before selling and moving? One way to go about this is when you buy your next property, a not uncommon practice is to write in a contingency about the sale of your existing home.

2) For a HELOC, you're not paying interest on the money if you're not using it. So I would try to nail down your timeline a bit more. You don't want to pay interest on that cash-out refi for 5 years before you put that money to use. The longer you wait, the more attractive a HELOC becomes, in my mind, because it doesn't cost you anything for it to be unused.

Mike Hanneman · Answer

I hate PMI, although your's is lower it's still money that is doing nothing for you.

I would see what I could get the best terms with, APR, etc... and have that help guide me. How soon do you plan on pursueing your next investment property? With the refi going by your numbers you'll be saving around $240 a month. Then you could always go back and tap the equity for another property.