Should I use home equity loan & how

Question

I own my current primary residence & have about 140K in equity. The plan is to purchase a new home & keep current as a long term rental. The new home needs remodeled for about 150K. Trying to decide if we should use a home equity loan for the remodel, do we need to put current home under LLC to help with debt to income ratio & would that affect getting the home equity loan?

Ty Coutts · Answer

If you plan to keep your current home as a rental, a home equity loan or HELOC could help fund your new home’s remodel while keeping your low mortgage rate. However, transferring your current home into an LLC may affect financing, as most traditional lenders require it to remain in your personal name for a home equity loan. Instead, consider a DSCR loan (based on rental income) or refinancing into an investment loan post-purchase. If DTI is a concern, rental income from the current home may offset it.

I work for Aslan who is licensed in 32 states, shoot me a DM or email if you'd like to talk further.

Nathan Gesner · Answer

Your equity is not a savings account from which you can withdraw for free. If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.EXAMPLEYou cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).

Key Numbers

• Home Equity Loan Interest Rate: 6%
• Mortgage Interest Rate: 7%
• Rental Income: $3,000 per month
• Expenses (management, taxes, insurance, maintenance): $800 per month

Income and Expenses

• Monthly Rental Income: $3,000
• Monthly Expenses: $800
• Monthly Mortgage Payment: $2,000

Explanation

• The investor earns $3,000 in rent each month.
• They pay $2,000 on the investment property mortgage and $800 on other expenses.
• This leaves $200 profit each month or $2,400 per year.
• However, you have to pay $6,000 interest on the equity borrowed.
• This leaves you with an annual loss of $3,600.

While the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.