Convert Primary Mortgage to DSCR on rental property?

Question

I have a rental property that used to be our primary residence. We used a HELOC on that property for a down payment and some renovations ($285k) on our now current primary residence.

Our rental property has a 2.99% rate and rent cash flows over $3k a month. We are paying almost $2k in interest only payments per month on the outstanding HELOC balance.

Is it possible or does it even make sense to get a DSCR loan on the rental property that will allow us to pay off the outstanding HELCO balance ($285K) and the remaining $390k mortgage? The rental property would appraise between $1.1 - $1.2 million.

Thank you in advance for any advice!

Mike H. · Answer

Some of the information above is a little hazy to me so my answer is based on the assumption that you currently have a 390k first mortgage at 2.99% and a 285k heloc balance on your investment property at some floating rate.

If that is in fact correct, here would be response.
1) Are you wanting to refi to pull cash out? Or just clean up the loans to get them into a single loan? At 1.1 million, you owe close to 675k so you won't be able to get much out.
2)  I would never give up a loan where you're paying 3%. Thats free money. I'd keep that 2.99% until I died - if possible.

I'm trying to understand why you'd want to change anything here. You've got an amazing cash flow and it isn't like you have a ton of capital tied up into that property. If you refi into a dscr loan, your cash flow is going to go down significantly. I just don't see why you'd want to do that at all.

I would leave everything as it is and enjoy it. And keep in mind that while you may be cash flowing over 3k a month, you really need to consider that the heloc payment doesn't really belong to that rental in terms of cash flow. You used that 285k to buy your current primary residence and fix it up. So really you need to take that heloc payment off your rental property numbers and put it on your primary where it belows and then see what your actual cash flow is on the investment property. I would guess you'd be adding another 2k a month.

I wouldn't touch your loans. Thats as good as it gets. You could use the monthly profits to pay down your heloc which at current pace would take about 8 years or so. But if it were me, I would never give up a 3% loan...... Its the closest thing to free money there has ever been in our history.

On 390k and 3%, your principal paydown is probably 700 to 800 a month. If you refi that same 390k today into an investment property loan at say 6.5%, your prinicpal paydown goes down to 450 a month or so.

So please keep that in mind too. Don't just look at the payment difference if you were to combine the two loans. Be sure to consider the principal paydown as well given you have a 3% loan.

Chris Seveney · Answer

Depending on hte rental income, you potentially could do this as DSCR is based on the rental income. But realize also that if you pay off a 2.99% loan your payment on the DSCR is most likely going to skyrocket and eat up a lot of that  cash flow.

Either way you are going to pay for it, it just matters which pocket-  as you could also refinance your primary residence but again that will skyrocket that loan.

The only way to make it go away would be to sell that rental. To me it does not make much sense to refinance personally.

Caitlin Davis · Answer

Yes, it’s possible to get a DSCR loan on your rental property to pay off the outstanding HELOC balance ($285K) and the remaining $390K mortgage. Based on an estimated appraisal of $1.1 - $1.2 million, you could secure a loan of up to $900K (75% LTV). This would cover the $675K needed to pay off the existing HELOC and mortgage, leaving you with about $200K after payoffs and closing costs.

However, it's important to consider the cash flow impact. To qualify for a $900K DSCR loan, you would typically need to show rental income of around $8K per month, assuming property taxes are about $10K annually and insurance is around $3K. Given that your rental property currently cash flows over $3K/month, the DSCR might be too low to qualify for the full $900K loan, unless you can show additional rental income or strong reserves.

If your goal is to access that $200K for another investment, refinancing with a DSCR loan could be worth losing the low 2.99% rate, especially since it would eliminate the high-interest HELOC. However, you should weigh this against the potential for a higher DSCR loan rate, which might affect your overall cash flow. I'd be happy to help you run the numbers to see if it’s the right move for you!

Matt Devincenzo · Answer

Why not a conventional cashout refi? You can obtain one for a rental, and it may have a slightly better rate than some of the other options.

As far as should you, blended rate is your answer right now you are paying 2.99% on $390K and 12% (a guess) on $285K. so:

((285,000*.12)+(390000*.0299))\(285000+390000) = 6.8%

So ignoring a few other considerations (payoff timeframe, closing costs etc) if you can get a refi for less than 6.8% then it may be worth it...

Erik Estrada · Answer

Hi Chris,

This would come down to what your blended rate is factoring both your HELOC and 1st Mortgage rate

Noah Wright · Answer

You'd be looking at a $4000-$4500 monthly payment on a standard DSCR if you paid off the HELOC and the 2.99%

Patrick Roberts · Answer

What's the interest rate on the Heloc? You'd likely be able to get a DSCR loan with no problem, but it doesnt look like it would make sense to do so. Unless your Heloc rate is well over 9%, youre better off just applying your excess cashflow toward paying down the Heloc balance, which will immediately reduce the interest that accrues the following month. Your blended rate will likely reduce with each payment as well.

Even at a note rate of 6%, the DSCR P&I payment would be $4,046/month, and interest would be around $3,400/month. The total amount of interest would likely increase.

Also, check your property bill closely this year and next year. You're likely to have a massive escrow shortage if you escrow taxes and insurance.

Convert Primary Mortgage to DSCR on rental property?

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