Cash out Refinance / BRRR Question

[Trevor Murphy]

This is my first house hack, and any information or insight is greatly appreciate!

I bought a duplex in the Seattle market for $583,000 with a conventional 30 year home loan 2.99% interest rate with 10% down.

My mortgage is $2800, I'm planning on renting the bottom for $2000 

I am renovating both top and bottom with cash from a Equity Line of Credit I have with my stock portfolio through Morgan Stanley at a 4.5% interest rate.

The total cash ill have into the reno (including labor, materials) is $140,000 ($100,00 of that will be from Morgan Stanley)

My question is if I want to do a Cash Out Refi, is that going to change my original 2.9% interest rate? and if it does would it still be worth doing if my interest rate increases? (lets use 3.5% for a comparable).

And would the better us of the money be to take that equity and re-pay the Morgan Stanley ($100,000) or take the equity and buy another house and use it for the down payment/renovation?

[David M.]

@Trevor Murphy

I'm going to skip the numbers --- thanks for providing.

But, I think you need to understand a bit of the mechanics of "refinancing a loan."  You aren't "modifying" your existing loan.  All that happens is you are getting a new loan.  Period.  

To make my typing easier, lets say you have a loan for $100.  Now you say you want to cash out refi and get $120.  The mortgage and lien associated with the $100 loan is wiped out when you get the $120 loan.  During closing, $100 out of the $120 that the lender is lending you is sent in to payoff the $100 loan.  Thus, your first loan is extinguished and this $120 loan is guaranteed to be the first position lien.  Since $100 was sent to payoff the first loan, now you get a check for $20 that you deposit into your bank account.

Remember, the lien position is key..

trying to figure out whether to refi includes determing your actual fees/costs to do the refi and how much interest are you saving per year.  that is, how long will it take you to break even in interest savings vs the cost of the refi (make sure you compare with actual costs and don't include the prepay/escrow stuff).  Given the length of time and your investment strategy, that will determine whether its worth it to refi.

Determining whether you want to continue to leverage is really dependent upon your investment strategy and finances.  Sometimes with real estate investing you have multiple approaches and its really just up to your intent/strategy and risk tolerance as to decide what to do next.

You probably should find yourself a good lender that will work out these aspects for you, i.e. your financing/loan options.  Then, you can decide how to proceed.  Hopefully you know how to determine your dti properly and don't forget that lenders will recalc your rental profit/loss on 75% of the rent schedule (not 75% of the profit...).

I hope that helps.  Let me know if you want to chat about this.

Good luck.