What am I missing

Question

My wife and I have about 80,000 dollars of equity built up in our four year old house. My wife found this mortgage broker /real estate agent that is advising us to refinance our house to pull out 80 percent of our equity for a down payment on an investment property in Miami Beach. The broker’s loan is some variation of an interest only loan, but it also gives you the ability to make a minimum payment that is less than the interest only payment. The broker’s logic is that they equity in our house is making us 0 percent interest so why not take as much cash out of the equity to be used elsewhere. Currently we have a fixed rate at 6.0 percent the new loan would obviously have a larger rate and would be a 3 year ARM
Next, the property is a new construction condo on Miami Beach. The developer is guaranteeing us the first two years of rentals covering all mortgage payments for the first two years. I am assuming that we could sell the condo after the two years are up and hope that the property gained in equity.

1)	I keep on asking myself what I am missing. What questions should I be asking this mortgage broker? 
2)	Is this the wrong time in the market to attempt something like this – or is this a good time since prices have come down
3)	I don’t want to lose my current house – should I even attempt this kind of loan
4)	Is this crazy?

Michael Rossi · Answer

YES!  Run, don't walk, RUN away from this mortgage broker as fast and far as you can!

Mike

Mark Y · Answer

Something I'm going to throw out there..... why refinance your current house with a worse mortgage than the one you have? Pulling equity out via a HELOC would be a much better choice IMO.

N/A N/A · Answer

I just want to add my two cents about pulling eqity out on a creative financing deal.  I have not, nor would I, do that, without having good financing and could afford to increase the payment to the point that it would be rentable in the local market.

I have a client with excellent credit that did that when the Vegas market was at a high.  They have since taken a job out of state and the home sits vacant with a $3,800 payment on a house they could rent for $2,000!  They had kept their good 1st, got a lousy second, and used the money on a risky deal.  They lost all of that money.  Unfortunately, they are now letting it foreclose because they can not afford to do anything else!  They took a great situation, buying right and having lots of equity, and they turned it into their nightmare.  They bought for $325k, took a $150k 2nd when the house was worth $550k.  The house is now worth about $410k, not bad if they hadn't messed with the equity!

My caution to you would be risk only what you can afford to pay for.  In your situation, I would think using $20k down on a rental that will positive cash flow FOR SURE would be a safer bet and accomplish a similar result.  For that matter, do that 2 or three times and spread the risk.  Banking on the market to boom is way too risky, and if the builder knew it was a sure thing, he wouldn't need your money.

Just one opinon :)

Account Closed · Answer

Crazy?

Maybe, maybe not. It does not sound like you have done much homework up to this point.

I do not know Miami but I have been reading that the city is very overbuilt when it comes to condos.

Second, the rental guarantee is only as good as the developer's balance sheet. If the developer goes out of business you have no guarantee.

Third, the supply could exceed the demand so that after two years there is little rental demand at the guaranteed level.

Fourth, your home is at risk if you pull out cash and then later can not afford to pay it back.

Focus on reading here and learning your local market better. There is such a surplus there will be deals in the future. There is no rush to act now. I think if you really wanted a deal finding a desperate seller of an existing unit or a developer who is even more motivated could make more sense. Or just staying out of the market for a period while trends emerge.

John Corey

Tom McGiveron · Answer

you're right to feel the way you do.

when you're saying this:

"and hope..."

then forget it.

unless you KNOW or have a VERY good idea of THE NUMBERS AND THE MARKET, do not under any circumstances get involved in a highly leveraged situation, especially when it's putting your private assets on the line.

getting involved in a negative equity loan and all those options to pay this or that is just another way for SOMEONE ELSE TO MAKE MONEY OFF OF YOU.

the questions you should ask YOURSELF is:

do i HAVE to do this?
how much control do i have over this investment?
what are the numbers?
am i comfortable with the fact that i could lose my house?
how's the local market where i live? (is your home going to continue to appreciate?)

now also - what do you and your wife do for a living?

where do you live?