Should I refinance and cash out home equity?

Question

Hello BP,

I own my primary home and have about 20% equity on it.

i.e. Loan: $200k, House worth: $240k

Can I refinance it over the $240k?

I could then pay off loan, and get the 40k equity in cash.

Next I could use the $40k to invest in another house.

Is this a good idea? Thanks!

Michael Lewis Lee · Answer

Hello Gaston!  I would not increase my personal liability in my own house unless I was very confident in my investment.  Regardless of what a Bank says a personal home is a liability, not an asset for you, but it is for them.  If you are doing that to pay off your personal  loan then it would be OK if you offer it to a person to buy.  If you go through a bank to refinance your mortgage, with just 20% equity that's not enough  unless you could convince them that there would be no down payment.

The closing costs and fees will add to taking out of your pocket.  Why don't you just sell it and get rid of the loan balance upon closing. The closings costs would be about 16% for a typical outright sale.  If you provide the financing the buyer and eliminate most of the closing or all of the closing cost.  You could charge a non-refundable deposit and make money on the monthly spread on the rent if you do a Lease Option and make more if they use the purchase agreement or you might just lease again if that is in demand in your area.

Many people get turned down for their financing but they are very able to make that payment at a higher rate than your existing mortgage that you continue to make those payments on time.  You'll also get a higher sales price by doing that.  I would assume that your house is in a good area.  The demand in that area is probably pretty good.  One of the best ways to go is with owner financing with no closing costs.  Good luck to you!

Gaston Torres · Answer

Thank you so much for your reply Michael. The information you provided me is extremely helpful. My house is in a good area and I would rather rent it out in the future. Probably the best thing to do is just save money for the next house without selling this one. Thanks again.