Does A Cash Out Refinance Make Sense For My Situation?

Question

Hi all,

Trying to slowly build our buy and hold portfolio in Buffalo NY to eventually allow rental cash flow to replace my W2 salary. Right now I own 2 duplexes. One was a personal residence that we bought about 10 years ago for about $89,000 and have since moved out of and rent out both units. It's now worth around $200,000 and I am trying to figure out if I should cash out refinance and end up with about $63,000 (leaving 70% LTV) cash to use for another rental down payment, or if I should just ride out the remaining 20 years of this mortgage with a small balance (only $62,750 left). It's going to cost around $11,000 in closing costs to do the refinance, and I would be going from 4.125% to 3.125% with another 30 year fixed loan for $140,000.

Is there a downside to doing the cash out refinance that I'm not thinking about? Wish I could tap into all of that equity another (read: cheaper!) way, but it seems impossible to get a HELOC on an investment property. Any thoughts/suggestions would be greatly appreciated!!

Thanks,

Patrick

Caroline Gerardo · Answer

Heavens! $11000 for a small loan is robbery.

Patrick McCracken · Answer

My understanding is that the $25,000 HELOC would get closed and the old loan paid off, so that this new mortgage is 70% LTV and the only mortgage on the property. I am confident in my ability to analyze a deal and hold out for good deals...just trying to accelerate my timeline by utilizing the built up equity that I already have.

Mike Redick · Answer

M&T won't do a HELOC on an investment property, but other lenders will. I've got two HELOCs on an investment property through PenFed Credit Union but you can try other banks/credit unions too.

That said, the risk with a HELOC is they are variable rate interest. M&T lets you lock the rate once, but I'm not sure if other lenders do. So if rates start going up (which they will eventually) the interest rate could become a problem.

Dana Whicker · Answer

Has the snow melted up there yet? JK.

The answer to your question is dependent on your personal risk tolerance. As for me, I would do it. I'm basically doing that now on a couple of properties. I'm closing both within the next 10 days. Keep on growing.

Brent Coombs · Answer

@Patrick McCracken, aren't you effectively asking for a third mortgage against the same property?  Even though you haven't spent your $25k HELOC yet, its liability would still take your LTV beyond the 70% you were talking about, right?

As well as agreeing with those folk who say $11k closing cost seems way too high, I suggest that the main issue you have (as with any Investor who can get cash out of thin air) is holding out until you find the right bargain (rather than only relying on future value increases which may or may not continue).  Well done on the historic gains though...

Caroline Gerardo · Answer

New York is an expensive state here are the real costs:

Escrow $500;  title $451; tax transfer $1025; notary $175; recording $80

Lenders charge an underwriting or processing fee about $1400

appraisal $450-500 no appraisal waiver is ever granted on a cash out loan, your loan officer is off.

total hard costs without points and tax or insurance should be $3056

there are HUGE pricing adds for a cash out investor loan as Fannie and FReddie don't want to buy them right now.

2.625 + .5 to points not rate

right now 4.5 rate can get you to zero points or $4375 in points to get to "par"

or 4375+3056= $7412

FAR FAR cheaper in long term to get rate of 4.5 at no points and pay $3056 plus your taxes, insurance and prepaid interest which are not charges; just on-going costs.

The difference in payment from 4.5 and 3.125 is pennies but $11000 is way too high.

$3588 is not your property tax impound no way...

You may find some lender won't want to do a cash out non owner as they can't sell them, then they price higher as there is a big risk to keep for long term.

Go back to your lender and ask them about increasing the rate to 4.5 and give you better numbers.

This is not a commitment to lend, rates change a couple times a day, I am not advertising just teaching.

Patrick McCracken · Answer

Thanks for checking, appreciate that. I talked to them on the phone and they said I would only have to pay for an appraisal if they had to send someone...might be able to do it virtually. And yes, I figure the $99/yr is well worth it to keep it open, but I'll realistically be paying more than that per year in interest so should be pretty negligible.

Mike Redick · Answer

Tried to look everything up, but couldn't find everything. If I remember correctly, they covered the actual closing costs but I did have to cover the taxes, appraisal fee, and a notary for the final signing. The taxes were only $305 so not a big deal really.

One thing I did just notice while looking everything up is there is an annual fee of $99 unless you pay that much in interest that year. So that's a little annoying but if you're paying it down over time it won't really be an issue.

Patrick McCracken · Answer

I just did some more digging and it seems like generally PenFed HELOC's are going pretty smoothly. Not sure what I saw before that made me think otherwise. I am actually liking this idea more. I saw something though that in NY you are responsible for paying any City/County/State taxes. I saw that sometimes there is a pretty big recording tax, but it says in their fine print that they cover recording, but I'm not sure if that's the tax or not. What kind of closing costs did you see when doing a HELOC through PenFed? 80% of my equity is probably around $110,000.

Also, I have been considering getting the exterior of the home painted as there is tons of chipped paint, etc. The units are beautiful on the inside but I'm worried that a "drive by" appraisal would not work in my favor. Do you think it makes sense to shell out $5,000 to have it painted before I start this process with PenFed? Obviously it also helps make it a more desirable home for potential renters too when it's nicely painted.

Mike Redick · Answer

What kind of mixed reviews? They've been pretty good for me, some of their processes are archaic (phone calls instead of emails, etc.)

The one minor issue I had is they insisted on a "drive by" appraisal where someone just looks at it from the outside, and that came back with a lower valuation than I thought... but you can request a real appraisal after that if you're sure the value is higher.

Does A Cash Out Refinance Make Sense For My Situation?

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