Bad idea to use primary residence equity to purchase a rental?

[Stephanie D.]

Hello all. I always get such great advice here. I am having a hard time getting a good mortgage on a rental property I have an accepted offer on because it has a pillar and post foundation. I can get a mortgage, but the rates are higher, it has to be insured, and can only be amortized over 25 years instead of 30, all of which affects cash flow. I was just talking to a mortgage broker and he suggested I refinance my primary residence mortgage at a great rate (paying a penalty that is more than made up by the better rate), and use the built up equity to buy the property in cash. It sounds like a great option to me, but is there something I'm not thinking of? This is a radical departure from my original planning and I have to make a decision today to meet financing conditions on our offer. 

[Colin Smith]

I think your mortgage broker sounds like a smart person, but the tolerance of risk is up to you. If you go his route then you will put a lien on your own property. If you finance the rental property, you could then put into an LLC and protect your personal assets if someone were to come after you. But the lower interest rate is tempting. You could always pay cash, do the rehab work to it, put tenants in it, and then do a cash out refinance to get most of your money back out in a year. I would also think its best to the least down so you can buy multiple cash flowing properties and not just 1.