Cash out refinance question

7 Replies

Can someone help me out understanding the full consequences of a cash out refi?  I bought my home 8 years ago for 59900. Owe just under 50k now. Worth somewhere around 120k. If I refi for the cash, and do the full 80%, that would be a new loan of 96000, minus the 50000 owed, means I get a tax free check for 46000 correct? Is this a smart option to get the 46000 and use that to purchase an investment property, or too risky since I’m assuming my current mortgage will double? I wouldn’t want to get stuck with a huge payment on my home, and if I purchase a rental and the cash flow only covers my new mortgage payment, it doesn’t seem to make much sense. Any advice is welcomed 

@Bill Zarzecki you have the idea correct. It's a pretty common strategy to use the equity in your home to purchase an investment property. There is some risk and, yes, your mortgage will go up, but it you purchase a good, cash flowing rental, it will more than make up for the extra payment

@jason diclemente

Thanks that’s what I figured. My fear is doing the refi and not being able to find a good cash flowing property or not getting a tenant quick enough and being stuck with a double payment that I couldn’t afford. 

@Bill Zarzecki you could look into getting a HELOC instead. That way your mortgage stays the same, but you have some liquidity in the form of a line of credit, for when you find a property. Buy the property, using the HELOC and then refinance that, pay off the line of credit, and voila! Investment property and your primary mortgage stays the same.

@Bill Zarzecki you have to do the numbers with the actual figures. 

In general if you can reinvest the money at a higher return than the rate you borrow at it makes sense. How far you go with that in part depends on your tolerance to risk. 

Most home equity loans are adjustable rate, so that is a risk.  Obviously you are putting you home at greater risk if you cannot make the higher payments.

Obviously you would have to subtract the loan fees, but that's how it works and one of the best things about holding real estate long term. I wouldn't borrow that extra money unless you plan to invest it though.

Howdy @Bill Zarzecki

To answer your question, yes, you can use the HELOC for a down payment. Just remember to include that additional payment in your calculations. The repayment will be a shorter schedule than your mortgage payment. Suggest at lest 12 months. HELOC s can be used over and over.

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