Refinancing a rental property to get 20% down on primary home

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Refinancing a rental property to get 20% down on primary home

Adam Christopher Zaleski
Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes

My wife and I currently live in a 2 bed/1 bath ADU (Accessory Dwelling Unit) on Kauai and pay $1500/month. We would like to purchase a single family home (3 bed/2 bath) with an attached ADU that is 2 bed/1 bath for around 500K. If we can come up with 20% down the total mortgage taxes and insurance should be around $2,150/month. The plan would be to live in the ADU and rent out the main house for $2200/month for the first 2-3 years. After that, we would eventually move into the main house.

We currently only have 32K in cash. We save about 1K/month, so it would take at least 5 years to come up with 20% down from just saving. However, we have 2 rental properties that we could refinance, so we have two options. I am leaning toward option #1.

My assumption is that we could get a 4.25% non-occupancy rate for either of the properties below.

Option #1:I am 5.7 years into the loan on the Florida house. It's currently worth 235K and I owe 76K at 4%. Current mortgage, taxes and insurance is $616/month and rent is $1700/month. We could pull out 105K and the new payment would go up to $1,111/month.

Option #2: I am 8.3 years into the loan on the Colorado house. It's worth 365K and I owe 112K at 4.75%. Current mortgage, taxes and insurance is $985/month and the rent is $2200/month. We could pull out 175K and the new payment would go up to $1,661/month.

Option #3: Refi both properties. Use 105K to buy a primary home and the extra 175K to buy another rental property. However, I don't see any value in buying rental property right now in my current markets. I think I would wait for the housing market to slow down.

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Harjeet BhattiPro Member
Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
9y

Why don't you purchase this PR with lower down payment 3% or 5%. This is PR you don't need 20% down payment unless you are trying  to avoid MI. In this case cash out from 2nd property because your interest won't go that high what you are paying right now.

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  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    9y

    Why don't you purchase this PR with lower down payment 3% or 5%. This is PR you don't need 20% down payment unless you are trying  to avoid MI. In this case cash out from 2nd property because your interest won't go that high what you are paying right now.

    1Reply
  • Greg Horn
    Real Estate Agent · Kilauea, HI · Member since 2015 · 95 posts · 27 votes
    9y
    Aloha Adam! I agree with Harjeet. If you're going to be living in one of the two dwellings on the Kauai property, you'll likely be able to find a loan where you can put down less than 20%. If you're ok with paying mortgage insurance and having the higher mortgage payment, this is the way I would suggest you go. Have you spoken to a lender here on Kauai? I'm happy to put you in touch with someone I work closely with who can help you look specifically at your options based on your exact situation to help you find what's right for you. Also, if you're not already working with a Realtor, I'd love to help you find the right place. I work with many investor clients and am regularly scouring the Kauai market for two-dwelling properties such as what you're looking for. Please feel free to call me or Direct Message me so I can send you properties you'd be interested in. Mahalo, Greg
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  • Adam Christopher Zaleski
    OP
    Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
    9y

    It would be a little more difficult to qualify for the loan with 5% down and paying PMI. We just had a baby and my wife is working part-time as a substitute teacher. Because her income is part-time, it won't count for qualifying for another 2 years.

    It would also be easier to get a deal with 20% down. We have already lost out on 2 deals with other people having a stronger offer than ours. I think part of that was only having 5% down.

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  • Jared Bouzek
    Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
    9y

    @Adam Christopher Zaleski In follow-up to the prior comments on putting less than 20% down, there is one little trick specific to the HomeReady program if you would rather put down 15% on a primary. A lot of people don't realize that if you purchase with HomeReady putting 15% down and pair it with lender-paid mortgage insurance, your total rate could be virtually identical to putting down 20% if you have high 700's credit. There are income limits depending on where you're looking, but if you fit the limit, that could provide a way for you to go down to a 15% down payment and have minimal or no affect in your interest rate.

    If you choose to pull cash out of one of the properties, I agree that Option #2 would likely allow you to lower your rate in the process if you have decent credit. You don't necessarily have to pull the maximum out of one of your other properties if you don't want to. You just want to make sure how pulling cash out of one property will affect your DTI on the purchase.

    Are they qualifying you using your rental income as well? I don't know how your RE market compares to Denver, but we're in a pretty hot market and I see a lot of people buy houses with less than 20% down. A lot of it can hinge on how your agent/lender are presenting your offer.

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  • Upen PatelPro Member
    Lender · Nationwide Lender · Member since 2015 · 1k+ posts · 814 votes
    9y

    @Adam Christopher Zaleski Find a mortgage banker that can get you pre-underwritten (address at TBD), then your offer with 5% down is as good a cash. You could even waive financing contingency and secure a purchase with 5% down. Else option #2 is your other best option. As an investment cash-out refi, you are most likely looking at rate in high 4-low 5.

    [email protected]571-200-6180
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  • Adam Christopher Zaleski
    OP
    Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
    9y

    I technically have enough money for 5% down on a 500K house with 32K cash. However, I would have zero reserves and 3 properties (4 total units). With 3 single family homes, I wouldn't be comfortable with less than 30K in checking accounts for reserves. This means that I could still do 5% down, but it would probably take me 2.5 years of saving 1K/month to get there.

    Do I do a refinance now with a rental property and buy a primary now or do I wait 2.5 years and put down 5% with money I have saved?

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  • Adam Christopher Zaleski
    OP
    Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
    9y

    I ended up refinancing the Colorado rental, as suggested. I got 4.625%. If the house appraises for 350K, I should be getting a check for 145K. This is a cash-out re-fi for an investment property that is a SFH.

    The previous rate was an owner occupied rate of 4.75% from 2009. The original rate was an owner occupied rate of 6% from 2007.  The original purchase price was 182K in 2007. I put about 10K into it for original repairs.

    The actual cost of the re-fi is a little lower than projected. The lender fees are $3200 and the pre-paid escrow accounts with loan interest is $2000.

    The remaining loan balance is 113K. The new loan should be 75% of 350K, which is 262.5K.

    My total mortgage payment with taxes and insurance will go up by $590/month. The old payment was $985/month. The new payment will be $1575/month. I just increased the rent on August 1st from $1950/month to $2200/month. I still have a $625/month buffer, so I feel good about the re-fi.

    As a result of the refi, my income went down. If I put 5% down, I can no longer qualify for a 500K home. My new max is 450K, with 5% down. However, I have significant reserves for repairs. I could buy a 450K home, put 50K of repairs into it and have it be worth 550K.

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