Question about equity and refinancing

[Trevor J Dammon]

Hi all,

Newbie here, trying to understand the math behind refinancing.

When I refinance a property to fund a new property purchase should I count the debt against the original property or the new property?

The question is a bit confusing so here is an example:

I put $50,000 down on a $530,000 property. I have a $480,000 loan at 5.5%. I make monthly payments of $2,725 and the property has exactly $0 cashflow.

I assume the property value appreciates 2% annually.

After 4 years, due to appreciation, the property is worth $573,700. So I have gained equity of $43,000.

Also, following my amortization schedule, I have paid off $27,000 in principle. 

This brings my equity to $120,000 ($50k down + $43k appreciation + $27k paid on principle). 

Now I use that equity to refinance and the bank gives me an additional $100,000, which I will use as a down payment (20%) for a $500,000 property.

I'm trying to put all this data into a spreadsheet, but after the refinance I am not sure how much equity (not even sure if it matters) I have in each property.

Scenario A: I count the new loan as debt on my original property. So my equity would drop to $20,000 and my loan amount would be $552,000 ($452k the remaining loan balance + the new loan $100k). And my equity in the new property would be $100,000 with a $400,000 loan.

Scenario B: I retain my $120,000 equity and just add $100,000 on to the first properties debt amount, bringing it to $552,000. While my new property I have $0 equity and a $400,000 loan.

[Zach Taylor]

@Trevor J Dammon The equity you have in a property is the value of the property minus your debt on the property. In your example after the appreciation, the home is worth $573k and you owe $453k. So that leaves you with 21% equity. 

When you refinance you are getting a new loan, paying off the first loan, and keeping the difference between the two. When you refinance the property the new lender often times will lend at an LTV of 80%. That means that they would loan you 80% of $573k = $458k. But you owe $453k on your first mortgage which you still need to pay back, leaving you with only $5k. If this is an owner-occupied home, you may be able to obtain an LTV of 90%, which would leave you with much more in the case of a cashout.