Cash-out Refinance advice for next property

20 Replies

I’m a 28 y/o female who just finished a owner occupied renovation using an FHA 203k renovation loan. I put 3.5% down, purchased the property at $110,000 and put another $110,000 into it. I’m estimating because of the market and recent sales on the same block my home is worth $315,000 now. I’d like to take the equity I’ve earned and put it into another property, which from the lenders I’ve been getting estimates from sounds like I can get between 24k-28k cash out. The first property I found I had been looking for months and then finally got a tip from a real estate investor friend. I need some advice on how I should proceed forward. I like the process of rehabbing a home and would like to do another rehab but don’t know what I can really do with little cash on hand in the Philadelphia market. Anyone in the philly area have tips on how to begin the flipping process with little money to start?
@Kristine Pedersen personally, I would not refinance. You're paying very low interest and any refinance will likely cost more than the $20k cash out, over the long run. I would loom into a HELOC, that way you keep the low interest rate, but also have liquidity for investing, that you can use over again.

@Kristine Pedersen I agree with @Jason D. to go with a HELOC over refinancing. It is quick and likely less expensive than refinancing. I recently went to a bunch of the credit unions in Philadelphia (American Heritage, Sun Federal, PFCU, Trumark Financial, PSECU, and Franklin Mint) to see the terms of their HELOCs. I eventually went with Sun Federal because they would lend up to 95% LTV. The only cost was paying for an appraisal. If you go the HELOC route at any of these credit unions, you should be able to get the $24-$48K you are looking for.

@Jason D. I originally considered it but wasn’t sure what the volatility of the market is right now. I am currently paying $130 in PMI and my interest rate is 4.5. If I refinance I could get rid of the PMI but would add interest. My lender says it makes sense to at least refinance even if I wasn’t cashing out to get rid of PMI and have increased tax benefits from the increased interest rate. Would it make sense to refi out of the PMI to a conventional mortgage and then do the HELOC or just live with the PMI for now?
@Kristine Pedersen my advice would be to refinance and get rid of the pmi. Another reason is because you can get rid of your escrow account and on your credit it’ll show a cheaper mortgage payment which helps with your DTI.

Getting rid of the PMI makes sense if it actually lowers your payment. Make sure the higher interest rate does not offset what you are saving in PMI.

Also the logic of paying more interest to save taxes is nonsense.  Why pay the bank an extra $100 to save $30 on your taxes.  Just pay the $30 in taxes and keep the other $70.

Originally posted by @Richard Jahnle :

@Kristine Pedersen I agree with @Jason D. to go with a HELOC over refinancing. It is quick and likely less expensive than refinancing. I recently went to a bunch of the credit unions in Philadelphia (American Heritage, Sun Federal, PFCU, Trumark Financial, PSECU, and Franklin Mint) to see the terms of their HELOCs. I eventually went with Sun Federal because they would lend up to 95% LTV. The only cost was paying for an appraisal. If you go the HELOC route at any of these credit unions, you should be able to get the $24-$48K you are looking for.

Just wandering, what are the terms of your HELOC?

@Lana Lee - 1 point above prime rate, so as of now 6%. Every 6 months the credit union changes the rate depending on the prime rate. Most of the credit unions I spoke with lend at prime rate or even below prime rate if you go with a lower LTV, however to get the amount of credit I wanted I decided to borrow up to 95% LTV of my primary residence

Originally posted by @Richard Jahnle :

@Lana Lee - 1 point above prime rate, so as of now 6%. Every 6 months the credit union changes the rate depending on the prime rate. Most of the credit unions I spoke with lend at prime rate or even below prime rate if you go with a lower LTV, however to get the amount of credit I wanted I decided to borrow up to 95% LTV of my primary residence

 What are your plans to use for?

@Lana Lee And remember, not all helocs are the same. Look at how they structure payments. Most are interest only, but I just got a heloc that requires 1% minimum payment. If I draw 50k my monthly payment will be $500. 95k, $950. That sucks for holding costs. Lesson learned for me.
@DeWayne Mann Were in wisconsin. We just opened a HELOC with waukesha state bank. They only do locally unfortunately. But they do up to 105% ltv. The interest rate is prime plus 3 or 4 I think. But the interest rate goes down the less ltv you take out. I'm going to take out about 20k. So my monthly interest rate cost is about 150 dollars a month.

Hi @Kristine Pedersen

How are you.

Your Loan Officer did not inform you correctly. You cannot refinance a FHA 203K loan for one year. You are only allowed to the refinance the loan into another FHA product with no cash out.

Let me know if you have any questions.

Regards

Joe Scorese

Originally posted by @Chris C. :

Getting rid of the PMI makes sense if it actually lowers your payment. Make sure the higher interest rate does not offset what you are saving in PMI.

Also the logic of paying more interest to save taxes is nonsense.  Why pay the bank an extra $100 to save $30 on your taxes.  Just pay the $30 in taxes and keep the other $70.

 Makes a whole lot of sense! As long as my appraisal goes for how much I'm thinking, the refinance to a conventional should drop my fees. Finance of America is estimating a $73 savings per month. Does anyone have experience with one bank vs another getting a higher appraisal? I'm guessing BOA is offering me such a low rate (4.6 vs 4.9-5.2) because their appraisal is expected to be low. 

I'm sure you are aware that if you refinance into a conventional loan - you're then able to re-use an FHA loan and put 3.5% down again for the next property. For what you want to do (another rehab/flip), I think that may be work better for you than a HELOC, as you'd have to put down 20-25% on another property if you've already got an FHA. As someone mentioned though, you need to verify if you've had the loan long enough to be able to refi it out of FHA... I don't know what those rules/regs are though, maybe you'd just have to speak to multiple banks.

It won't let me tag Joseph the lender above - but I'd be interested in knowing more about the FHA refi regs and why you can't refi into a conventional mortgage??

@Michael Noto I've owned the property since April 2017 and finished the renovations to a point where the HUD consultant and contractor deemed "livable condition" in November. Unless there is a clause that says I have to have lived in it for 1 year, then technically I have owned it for more than 1 year

@Kristine Pedersen one other to consider if you haven’t already. Once you go to refinance into a conventional loan as owner occupied the lender may require you to owner occupy for another year. We’re in the same situation. Bought the property in feb.2017 fha then refinanced to conventional in May 2018 as owner occupied with 75% LTV The highest we could find. BUT in our paperwork at closing I saw -must occupy for at least 12 months. So even though we can go and use fha again as owner occupied we are stuck waiting for at least 6 months because most lenders will not do the loan with fear of it being rejected by the underwriter. Only way we can probably get in another property this soon would be if we had a child( the need for more room) or the property Is real close to my job which from what I’m told by some lenders would be a good enough reason for the underwriter. Just FYI