Cash out Refinance into a Higher Interest Rate?

41 Replies

hello all, I currently have a 30 year fixed 3.0 rate on my primary SFH residence. Paying about 1250 a month. I have close too 200k in equity. Would it be smart to do a VA cash out refinance to a 30yr 3.8 rate and pay around 1,800 a month? I would be getting 100,000k cash at closing. ( Not taking full amount of equity).

Goal: Renovate me basement and possibly purchase a mixed use property. Thoughts? HELOC better?

I see a similar question to this on here almost daily- I don't know why people gravitate towards cash out refis without considering a HELOC. Helocs close for free- in many cases you don't even have to pay for an appraisal. You can pull WAY more equity out, you don't pay interest until you draw on it and you can do anything you want with the funds.

Sure, you might be able to get a bit lower interest rate, but by the time you pay closing costs and interest while the money is sitting in your savings account, you've likely spent more on it than the rate savings could ever be.

Obviously, I vote HELOC! Best of luck.

you will be paying $550 per month in order to get $100,000. here is the question I would ask myself in making this decision: can I make that $100,000 earn more than $550 per month? if the answer is yes then you are making money on the deal. if the answer is no you are losing money on the deal. for me if I were doing it to buy a cash flowing property it would make sense. if I were just using the money to remodel my basement I wouldn't do it.

@Josh Dillingham Thanks for the tips. So I would like to do both, renovation and another property. Santander Bank approves me for 90,000 for a HELOC. 5.5 rate. Would this be better to use to renovate and also possibly buy a 2nd propoerty. Basement renovation should be around 25,000 but I would like the space as it would increase value of Home and I have now a baby and would like that done for her as well.

@Corby Goade I see what you are saying. I told USAA to lock in my rate at 3.8, they sent me paperwork via email. Is it too late to back out? I haven’t signed anything yet. 

As far as HELOC, I have shopped around and Santander back approve me for $90,000 with a 5.5 rate. Do you think this is a better option?

I’m expecting my basement renovation to be around $25,000. I would also like to buy a mix use propoerty with left over money.

I would Buy a few Properties or multi familiy and say produce 2k or more monthly cash flow and use all that to finance the basement renovation and increase in monthly mortgage payment

As far as refi vs. heloc you would need to know what the closing cost of the refi would be and the difference in monthly payment between the refi and help because of the different interest rates. With a heloc the interest rates will go up and down, they aren't fixed so that is an element of risk you are opening yourself up to. As @Corby goade said the benefit of heloc is that you don't pay any interest until you use the money. So if you think you will get a heloc for 90k, then use 25k to Reno the basement then it could take a year or more before you want to buy the property a heloc becomes more appealing because you aren't paying interest on the $65k of unused captial like you would if you did a cash out refi.

@Josh Dillingham Yes perhaps I should focus on the renovation first instead of trying to do everything all at once. I get excited at times I suppose. I'm in Staten New York. Estimated closing cost USAA document sent me says $14,000 and some change. That seems ridiculous to me. I haven't signed any paperwork yet to proceed. I feel I might just back out and cancel. I know I could pay down the HELOC myself and give a little extra to pay down quicker.

@Eric DeVito

Hi Eric. 

Specifically for a Refinance, you should know about the Mortgage Recording Tax. HELOCs should pay that tax but you better check with them first.

There should not be a Transfer Tax, those are on Sales of a building (or home).

I think you must mean "Mortgage Recording Tax."

A Mortgage Recording Tax is NYS and NYC Tax to have a new Mortgage Recorded. Here is a link to that tax: NYC Mortgage Recording Tax

As an Example, below is one of my Filings for a Mortgage of $720k for a 3 Family (note that a 1 or 2 Family building will be different than a 3 Famiily but you can research how much it should cost):

From the Above, you can see that it's a pretty hefty fee. In this case, for a $720k Mortgage, I paid around $16k of just the Mortgage Recording Tax.

If you are going to pay a bit for the Mortgage Recording Tax, you should call banks that can do what we call a Consolidation Extension and Modification Agreement (CEMA). You can read about it here: What the heck is a CEMA?

BASICALLY, you do NOT replace the Mortgage. What happens is that the new Mortgage Company Modifies the existing Mortgage in a way to blend the Interest Rate and other terms correctly. It will cost about $1k for doing that work.

SO, if you are going to spend much more than $1k for your new Mortgage in Mortgage Recording Tax, you should be considering doing a CEMA.

Not All Banks do a NYC CEMA!! So make sure you call each bank and ask them if they can do a CEMA. Also, your bank has to give permission for the CEMA to occur as well. So call your current Mortgage Bank and ask.

Hope that helps.

@Eric DeVito , just because you locked a rate, you are not required to close the loan, so you can walk away. There are lots of different ways to do this, but I've used a HELOC to grow my portfolio and it's been a very flexible and inexpensive tool. Here is what I would do in your situation:

-Open a HELOC, but tell the bank you would like to increase your LOC after your renovations, see what your options are.

-Use the HELOC to fund your renovation.

-New appraisal, increase LOC

-Use HELOC to buy properties, in full, with cash (if at all possible in your market)

-Refinance your new investment property in to a 30 year fixed, use cash to pay of HELOC. You can season your loan for six months or use Delayed Financing to refi immediately. If you get GREAT deals, you could pull 100% of your cash back out.

-Repeat, repeat, repeat. You can do this up to 10 times using traditional financing, then portfolio loans thereafter.

Best of luck!

I would use a HELOC to finance investing, I would never use it to finance a renovation. The basement will be lost money and at best will likely only return a portion of the cost upon the sale of the property. You will never actually benefit financially since a personal home is a liability.

Pay for the basement reno out of your regular savings as the build progresses and as you have the money saved.   

@Eric DeVito Great, congrats! Yes, you can, but some HELOCS have fees if you close or refi before holding it for a certain period, so ask your lender about that. We just refi'd our HELOC and had to pay a $500 fee, but it was still much less than paying closing costs on a cash out refi, plus the bank paid for the appraisal, which was about $500 anyhow.

Also, keep in mind the interest rate is variable, so it will likely go up, but that should be a drop in the bucket. Our goal is to never carry a balance on the HELOC for more than six months. Feel free to reach out any time if you have questions about the process or get stuck. Best of luck!

Unless you renovate the Basement "legally", thus increasing the formally registered square footage of the home by the full size of the basement, I don't recommend spending those sort of dollars on it. Why? Because otherwise, it won't increase the value of the home at all! Do you know how much such a permit costs, or whether you would even get City permission? My 2c...

Originally posted by @Eric DeVito :

@Corby Goade I see what you are saying. I told USAA to lock in my rate at 3.8, they sent me paperwork via email. Is it too late to back out? I haven’t signed anything yet. 

As far as HELOC, I have shopped around and Santander back approve me for $90,000 with a 5.5 rate. Do you think this is a better option?

I’m expecting my basement renovation to be around $25,000. I would also like to buy a mix use propoerty with left over money.

Is that 5.5 fixed rate ? We recently set a HELOC with American Heritage credit union with a fixed rate of 3.99, 3 years draw period with and 10 years Amortization .

Typically, HELOCS are variable and you CAN lock the balance at a rate as you spend it to a specific amortization schedule. Most of them will automatically lock at the current rate and amortize after a certain period, typically 10 years.

@Thomas S. usually my contractor doesn’t get a permit. Renovated my house without one. He’s not full time contractor anymore, family friend. Anyway I figured the basement should be done because I would like my house to be a long term Home and also i have a newborn so extra space would be beneficial as she gets older.

Hey @Eric DeVito , you pay off the HELOC because you are pulling cash out of your rentals, not because you have a pile of cash sitting around. Here's a simplified example:

You find a good deal and pay for a property with your HELOC, $75K

Spend $15K fixing it up. Heloc balance is approx. $90k.

You do a cash out refi of your new rental, which appraises for $140k (65% LTV is $91k) and use that cash to pay off your HELOC. Now you have a 30 year mortgage on your rental at $91k (plus closing costs) and you've paid off your HELOC. You can start all over.

@Corby Goade I see, I understand. I was looking into a mixed use property. As for my basement renovation is my personal home I meant I won't be able to pay that off in 6 months if I use the HELOC for that. Thoughts on that?

I bought my house for $255,000 I’m 2015, valued now around $450,000.

@Eric DeVito , right, it would be tough to pay that $25k for your personal renovation off quickly. However, if you come up with a couple great deals on property and do cash out refinances, you might be able to pull enough equity out of those properties to pay off your HELOC and have it locked in at 30 years somewhere else.

You could also call the bank after you complete your renovation and ask them to lock in the $25k at the current rate so you don't have to worry about paying 10% on that in a couple years if rates skyrocket.

Sounds like you have a ton of equity, congrats! Make sure you get your work permitted so that you can tap in to the additional equity.