refi for cash

Brian Campbell · 2008-09-30T13:50:50-07:00

Am I crazy with my new plan? I have a home that I refied 5 years ago. I refied 90k for 10 years at 4.4%. I Now owe 55K and have 5 years left. My payments are 1200 a month, me and my wife (we've never married) have secure, decent jobs and can save about 1000 a month. I only have 20K cash and want to buy up to 2 rentals if the situation is right in the next year or so. I've been through many scenarios. I have a possible partner in a family member. I would like a partner to split the risk and also because he brings maintenance knowledge to the table. This would also split the cost of down payment. I have reached the conclusion that I should refinance my house and pull out 40k equity (I have 55K I could pull) through a government refi (at 95%) my broker told me about at 6% for 30 years making my new payment 730 and saving us 470 a month. My plan is to take the equity while I can and be prepared to strike when I need to at the same time pocketing more cash with mortgage payment savings. I want to buy a rental for no more than 75k using my wife's (were not married) credit, Then buy a bigger home for us using my first time buyer incentives (teacher with great credit) and rent the home we live in now that I am going to refi, giving me two rentals. Does this sound rational? I know refinancing will cost a lot more, but I will make 450 in rent (covering expenses) over the mortgage and will have gotten 40k out of it in advance. There will still be equity in it and I figure I could ride it out until it appreciates and then sell. We're apprehensive in that we've worked hard to get this house paid off, but at the same time, I don't like the neighborhood and want to move anyway. So, if its just for rental should I care that I owe for 30 more years? Is it better to take the equity in this situation. The flip side is I use my cash and cut my reserve in half or worse. I've been changing my mind to think that what's the point in having equity if I cant spend it. I am thinking about doing this tomorrow, so If I'm making a big mistake let me know. I want to act while I still can. I

Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

17y

First, what's this house worth? You think you can really get a cash-out refi at 95% LTV? Frankly, I'm amazed at that.

You say the new payment is $730. I assume that's PITI. I calculate P&I at those rather astounding terms at $570. Are you sure this broker's not smoking something? Is there an up-front fee?

What can you get in rent? Do you mean it would be $1180 or $1020?

How are you going to buy another house with "first time buyers credits" when you already have a mortgage in your name?

What is it in your area that's going to cause appreciation? I think we have several years of falling prices to come, notwithstanding local factors.

I don't quite get your plan for the cash. You get $40K, and then talk about buying a $75K property using your wife's credit. Then you way it will use up your cash and cut your reserves. I don't understand exactly what you're thinking.

How much rent can you get on this $75K property?

What's going on in your area?

Personally, and you'll find many who disagree, I think a house your live in is a liability, not an asset. I would prefer to owe less on my residence, not more. Lots and lots of the people who are in trouble right now are in trouble because they took all their equity. If you're really getting a 95% loan, you're taking ALL the equity and then some. If you have to sell, you will have to bring money to the table, if the loan balance is 95% of the sales price. Further, if there really was appreciation, you'll owe tax, even though you've already taken the money.

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Brian Campbell

OP

perris, CA · Member since 2008 · 41 posts · 0 votes

17y

My house is worth 130K today based on comps. I owe 55K.

I know I can get 1300 in rent today based on a comp right next door, I would pay yard and water/trash about 150 a month.

Our current mortgage is in my wifes name only. I have never purchased a home, however I have excellent credit and a good job (well, secure job as a teacher).

730 is PITI on the refi

My loan officer told me it would be an FHA refi. Said he's done a lot of them lately. They are having a rush on them. He is with quicken loans. And I did our last refi with him.

If I can find a property for 75K 3bd/2bth I can get 1200 rent anywhere in my area (within 25 miles) today. I am in the inland empire of Southern Cal. There are hundreds of foreclosures and short sells dropping in price/value monthly.

I don't plan to live in this house much longer. I don't like the area and its a little too small for me. So my options are to continue paying 1200 for 5 years then move and rent it pocketing 1200 or more for as long as I want. Or

Use the 20k cash I have to buy a rental and new house for us to live in and rent this one for a loss for 5 years (but they would be paying a lot of principle for me). or

Stay put for 5 years. I am not in a huge hurry, I just want to make the right decison financially. I was thinking taking the cash now is better than gambling on the future (with the savings in mortgage I would be getting 65K over the 5 years). And in 5 years I could have 3 or more rentals. Is that better than having 1 or 2 rentals, living tighter but having this house paid off? Is the strategy ludicrous or is it a matter of perspective?

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

17y

Paying $75K for a house that rents for $1200 would be a decent deal, IMHO.

$1200 rent
$600 expenses (50% rule of thumb)
$600 NOI
$499 P&I payment ($70K, 7%, 30 years)
$101 cash flow.

If you put in a down payment, your cash flow would be even better, though that's really just a return on your cash.

Paying $130K for $1300 in rent would not be a good deal. So, refinancing your current house to 95% would not be a good deal. Did the house next door actually sell for $130K. If you could really get that, and you want to move, I'd be tempted to sell. You'll net about $117K after closing costs and the inevitable concessions. Pay off the $55K and you've got $62K. The exclusion on primary residence sale means you'll pay no taxes on the transaction.

I really just don't see any upside to renting it for a loss, and taking a risk of continued price declines.

I'd maybe even consider renting for a bit. Things are unpredictable, but it seems likely prices will continue to fall. More so in the Inland Empire than closer to the coast. So, collecting the cash now and holding off on buying a residence might be reasonable.

If you can easily find houses for $75K, I'd dig a little deeper and find ones I could buy for $55-60K. That would give you that much more room if prices do continue to fall.

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Brian Campbell

OP

perris, CA · Member since 2008 · 41 posts · 0 votes

17y

If I did refi, I would only take 40K leaving me with a 95K loan and a 730 payment.

I fear selling while the knife is falling, I've done this with stocks and lost my arse a few times and would rather hold until stabilization. At 730 a month I can rent and not lose money (not going by the 50% rule however). But that scenario vs selling is the dilemma.

My real query is, is paying it off and netting 1200 in rent for 15 years more lucrative than pulling out 40k and collection 450 a month for 15 years. While the numbers suggest paying it off, there is the potential of losing money in future investments I cant make without the cash.

Homes are not yet plentiful at 75K unless your looking at 2bd/1bth. But I believe they will be soon. Perhaps they never will be. I just wanted to be ready when they do. I am putting in offers but not yet getting bites.

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Mike Henderson

Residential Lender · Littleton, CO · Member since 2008 · 128 posts · 16 votes

17y

The one thing that potentially concerned me in your plan. It sounds like one of the things your potentially doing is having you buy the new primary residence in your name. That new $7,500 tax credit does not apply to you.

Your wife had property in her name which doesn't let you take advantage of the new tax break. I have the exact same situation and wanted to do the same thing.

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refi for cash

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