Cash Out Refi on Investment Property for Down Payment

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Cash Out Refi on Investment Property for Down Payment

Jonathan Peters
Member since 2018 · 12 posts · 0 votes

Hi All,

My wife and I own an investment property in California. The home warranty originally purchased as a primary residence with an FHA 30 year mortgage. We have ~20 years left on the mortgage and the fixed rate is 5%. Monthly mortgage is ~$1300 (~$1800 w/ taxes, homeowners insurance, PMI). Our renters pay $1950/month.

We currently rent in NYC and recently had an offer accepted on a condo in Brooklyn. For the funds the down payment on the Brooklyn home, we have been speaking to our mortgage broker about options. He recommended a cash out refi on the California home.

However, the cash out refi we were quoted is at a higher rate (5.5%) given the home is now an investment property. And the monthly payment will go up to ~$2600/month. We'd be pulling out $397,500 and paying down the previous balance on the home of $209k. We'd also pay off our ~$70k of student loan and credit card debt. After closing costs of ~$8k, we'd be left with ~$110k for the down payment on our Brooklyn home.

The 20% down payment on the Brooklyn home is $164k. We have the extra $54k and $30k for closing to toss on top of our cash out for the down payment.

I'm worried about the cash out refi on the California home at a higher rate than we have already. And after reading some posts on here, I'm wondering if we should be considering a HELOC instead. My mortgage broker never brought up that option. Appreciate your input and advice.

Thanks.

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  • Alex Furini
    Architect · Cary, NC · Member since 2018 · 96 posts · 63 votes
    8y

    Jonathan,

    Heloc's are great for down payments on properties. In my opinion they are one of the only sources of "borrowed" funds that a bank will allow on a mortgage application without having to jump through lots of hoops. I have personally done this for a property in Brooklyn. 

    That being said most banks do not offer Heloc's on Investment Properties. Rather they would need to be on an owner occupied property. You would need to do some research (Ive seen a thread on BP discussing which banks offer these type). 

    I personally did not want to do a cash out Refi, as I planned on paying off the Heloc Downpayment funds much faster than the 30 year refi note. However, a refi CAN have a set interest rate, while a Heloc will most likely have a variable rate. Which FYI, is currently going up. It really depends on what your plans for the future are. Do you you like the security of a fixed payment each month or do you like the freedom of having essentially a large credit card to use for purchases.

    Best of Luck,

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  • Jonathan Peters
    OP
    Member since 2018 · 12 posts · 0 votes
    8y

    @Alex Furini Thanks for your insight. We decided to move forward with the cash out refi at 5.5% and are pulling out the $397,500. I was charged the appraisal fee yesterday, so we're hoping to have that deal closed in the next ~2 weeks. We didn't end up exploring the HELOCs too deeply, especially since the variable rate (and current climate around interest rates) made us think the fixed rate on the cash out refi suited us best. We also confirmed with our mortgage broker that there is no penalty for paying down the new mortgage early, which we may do once we can assess our financial situation after closing on the Brooklyn condo.

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