Refinance Primary Residence to Fund Downpayment?

Question

We have been in our primary residence for 8 years and, after a call with the bank, I can access around $125,000 of equity. Assuming 25% down, I have around $500,000 of purchase power. This would be accessing around 50% of our equity.

If we wanted to we could likely access around $150,000 more for total buying power of around $1.1M, but I feel that is too large of a mortgage to carry right now on our personal home.

Accessing the $125K would require refinancing our primary residence. Our mortgage matures next October, at which point the rate would of course reset. Current rate is 3.44% fixed.

In my day job, I could likely save $125,000 cash in three to four years, which would not require a refinance or swallowing the cost of "reborrowing" against our primary residence.

What are the benefits and pitfalls of a refi, to put a downpayment on an income property?

I've got quite a few solid people I can ask for advice, but this is the internet, and if you don't ask Reddit, you're missing out on tons of hilarity.

Any advice greatly appreciated. Virtual beers for you.

Dave Skow · Answer

using you primary home  as colateral to borrow funds  is  normally  better than  using an investment  property ......if your  present  1st mtg  was fixed at a super low rate , I would advise to not  do a cash out  refinance  but since you have an ARM thats  adjusting soon ,  you can   possibly kills two birds  with one stone  (  refinance  out of the ARM and get  cash back ) at the  same time ....also  consider that  the higher amount of  cash out  you  pull out and use - that means the  debt on the  investment  proeprty will be lower  which means the positive cash flow will be larger ..this  will help as  you analyze  possibly living with the  larger  cash out loan amt

Benjamin Aaker · Answer

Hi James,

Refi benefits:

You get a large chunk of tax-free money to use as you wish.

Refi Pitfalls:

Your interest rate will undoubtedly go up. Your principal will increase as well, so your monthly payments will increase.

You get a large chunk of money, but you don't immediately have a deal to spend it on, so it sits in the bank, making 0.1% while you pay 5% for the privilege of the bank sitting on it.

I'd like to suggest the HELOC. I'm a huge fan of this product. The rate will be higher than a new mortgage, but it is basically an account that is ready when you need it. You aren't paying interest on it until you use it. Talk to your banker about this possibility. There's a small annual fee and you will have to do an appraisal (just like you would for a refi).

Nick Belsky · Answer

Account Closed

Very common practice for funding investments.

Only pull out what you need, not what's available to you.  As many others have pointed out, the rate will be higher, but if the investment CoC Return covers the difference in rate and your cash flows are still meeting your metrics, then you are winning!  If you pull out $125k, you could possibly use for down payments on several properties instead of just one.  If the deals are right, you could not only increase cash flow for the short term but also long term as well.  Plus, as those properties appreciate, you now have multiple sources of funding for more properties should you decide to scale in the future.

Many lenders are offering ARM option for cash outs as well.  The lower the LTV, the better rate you will get.  5/7/10 year ARMs are pretty common.  That gives you 5/7/10 years of a fixed lower before adjustments begin.  If rates do go back down, you can refi into something else, provided your Pre-Payment Penalty has expired.

Please avoid Reddit.  Those folks are nuts and are key sources for misinformation spreading for loan information, among other things.

Cheers!

Andrew Garcia · Answer

Hi Account Closed, if you were to refinance your current home, your rate will likely be 2 percent higher than your current rate. Something to keep in mind.

Depending on where your interest rate is currently at, a HELOC might be a better option for you. The downside with that is that most HELOCs are ARMs. With the rising rates, you could end up with a higher interest rate than going with a cash-out. There are some fixed-rate HELOC options as well.

Hope this helps! Let me know if I can be of any assistance.

Refinance Primary Residence to Fund Downpayment?

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