Paying off Home or Refinance and Take Cash Out- advice please!
Rental Property Investor · Klamath Falls, OR · Member since 2016 · 146 posts · 213 votes
Okay, so I know much of the advice out there says to leverage your primary home to increase your capital for buying properties. I'm considering going a different direction and paying off our primary home to increase cash flow. We bought our primary as a foreclosure in 2011 for $140,000 and currently owe $126,000. The house is valued at $220,000 so there's plenty of room to refinance and pull out enough money for a multi-family down payment. We own 2 multi-family units (10 total doors) and could buy 2-8 more doors with the cash out money. With current rental income we can save $3000/mo towards additional units separate from our personal expenses. Is it wise to accelerate the timeline and do a cash-out refinance for more properties faster or pay off the home mortgage and mitigate risk?
Option 1: Cash out refinance to purchase new property/Increase Cash Flow: + $1000/mo
Option 2: Aggressively Pay off Home: + $1000/mo
You can actually do both with a different product. Look into a HELOC. See if there are any banks that can refinance your entire mortgage into a HELOC. The benefits are this:
The downsides to HELOC:
My personal opinion on this strategy is that it works really well for those who hate having money sitting idly around but may not have a ton of deals ready to go after. If you have more deals than you have money, maybe just pull the equity out depending on the interest rate. But if you're like me and 95% of the other investors on BP, you can probably earn an immediate return by paying the house off but still having access to it with the HELOC for when that deal does pop up.
Best of luck!
I'll look into that. I didn't realize that a HELOC could cover the mortgage and the equity portion. Are these risky in terms of having your loan called or jeopardizing your credit score? I don't have a problem with cash sitting around. Once it's in savings it's actually hard for me to spend it. So if the risks are greater with a HELOC, then I might need to do the cash out refinance. However, from the information you provided it seems like a HELOC has more flexibility. Good food for thought, thanks!
Yes there are some lenders that will give you a HELOC for 90% LTV (more favorable rates at the 80% though) and so you can use the HELOC to pay off the main mortgage and carry only the HELOC. As far as having a loan called, I've never heard of anyone doing it before and as long as you're paying your HELOC payments on time they have no reason to call it in. The only way it will ruin your credit score is if you stop making payments.
Here is the difference between holding onto the cash or using the HELOC. Let's say you have a $100k mortgage with a $1000 P&I mortgage payment (just to make the numbers easier) and have $100k in cash in the bank.
Scenario #1 - Keep the cash in the bank and pay the mortgage regularly
Scenario #2 - Refinance the home with a HELOC
To sum it up, the HELOC gives you more flexibility and an immediate return on investment if you're going to be paying down the mortgage fast. The other part that I didn't mention, let's say you only have $50k in cash and you want to take the HELOC for the full $100k. Instead of having a $100k mortgage payment, you put the $50k against the balance and your new HELOC balance is only $50k (which means you only pay interest on the $50k, NOT the $100k).
Another thing I worked out a few months ago was this: let's say you have $0 in the bank currently but want to pay the mortgage off faster and you can dump a large sum of money into it. You can actually get compounding results by doing so with a HELOC that you won't get with a regular mortgage. Say your balance is $100k and the payment is $1000 per month. You want to start making $3000 monthly payments to pay this bad boy off fast. First month, you put $3000 and $2500 goes towards principal and $500 towards interest (using arbitrary numbers here, just to illustrate a point). So the next month, your mortgage balance is $97.5k and the payment goes down to $975, but you still make that same $3000 payment. Your second payment will have MORE towards principal and less towards interest because the balance shrank, meaning you are now lowering your total cost of the loan AND lowering the monthly payment each time.
When I calculated it out, I was able to pay off a house much faster with a HELOC using accelerated payments than I was with a traditional loan, PLUS it minimized my monthly expense for that house if I ever had any issues with cash flow that month. ON TOP OF THAT, when i put $3000 into the house payment, I am able to pull just about all of that back out the following month if I needed to. If it was a traditional mortgage, that money is locked into the house until you pull another home equity loan out. Every time you take another loan out, you incur origination fees, etc. HELOCs are generally cost free to open and have $30 - $50 annual fees to keep open.