Ok, is this a dumb idea?

Question

Let's assume that I can pull out approx. $225,000 in equity from my home. Let's also assume that if I do nothing with it I am able to pay the monthly note to satisfy the loan. Seeing that rates are pretty low right now is there an argument against pulling money out, paying down the loan according to the terms and at least getting the tax deduction on the interest while waiting until prospects develop to then use to put a down payment(s) on a property?

John Vo · Answer

@Ali Sheik Here's another option for you. Instead of doing a cash-out refinance where you would immediately have a monthly payment, why not consider a HELOC? This is essentially a credit card that's secured by your property. Like any other credit card, you would only need to pay for what you used. If you don't take out an advance then you would pay nothing. The cash draw period can be anywhere from 10-20 years depending on the bank. Also there's currently several banks that offer interest rate lock on your cash advance during the draw period. This way you can get access to funds for your deals when you need it vs. having to withdraw funds when you don't need it and pay interest during that period.

Ali Sheik · Answer

@John Vo @Adrian Stamer Thanks for the replies. Appreciate the information and link John. Sure is a big help. I will surely look into going down this path. What really appeals to me is not having any closing costs. Thanks again and good luck!

Adrian Stamer · Answer

Heloc is what you are looking for. Variable rate yes, but infinity more flexible

John Vo · Answer

@Ali Sheik I thought the same way, until I started comparing banks for HELOC recently. Some banks do offer interest rate lock such as BBVA Compass, and Chase. Banks differ on how many rate locks you can have during the draw period. Some have 3 as maximum and some doesn't have a maximum. For example, if you withdraw $10K when you open the account, and then another $10K 6 months down the road, you can rate lock the fist $10K at say 4% and then the 2nd $10K at say 4.25% since the interest rate vary. I'm doing a HELOC on my primary residence right now and here's the kicker, there's no closing cost for me. The bank paid for it. I used this little brochure to compare the banks that I called:

http://files.consumerfinance.gov/f/201204_CFPB_HEL...

I called 3 national banks, 3 regional banks and 3 credit union to see whose HELOC program would work for me.

Ali Sheik · Answer

@John Vo Hi John. Thanks for chiming in. I was under the impression that a HELOC was only given with variable interest and that there wasn't an option for a fixed rate period. If you know of any banks who do this I might consider this as an option.

Ali Sheik · Answer

@Aaron Howell  Thanks Aaron. Pretty much what I figured. If I am not mistaken from what I have learned is that income/debt is more important when it comes to SFH or small MFH but if one were to invest in a 5+ apartment (large MF) your income/debt is irrelevant vs. the importance of the income derived from the property itself.

Aaron Howell · Answer

You could in theory do 20% on a $1million loan.  Your debt-to-income would come into play at some point in the process.

The familiarity you'd have with one bank might help but I would still say shop around.

Ali Sheik · Answer

@Jibu Vergis  @Aaron Howell  Wow, you guys are fast. Thanks for the prompt reply. How about a follow up question as I am trying to educate myself here?

Suppose that I have $200K from cash out refinancing. This is all debt of course as it is a loan I have taken out on my home. How much leverage can I get out of this if I want to plunk on another property?

Hypothetically if I choose to purchase a property for $1 million that $200k would satisfy my 20%. Is this possible or would this be flagged as a 100% loan and this be automoatically rejected? Would it help by using the same bank or another bank to make this transaction possible?

Aaron Howell · Answer

No... I think this idea (pulling equity) is pretty common here on Bigger Pockets.  If you can make the payments by pulling the equity out I would say go for it.

Ok, is this a dumb idea?

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