Is Cash out refinancing on this property worth it?

Question

Hi all,

I am not sure if this is the right place to post this question. Apologies in advance.

So I have a property in Massachusetts that I purchased 3 years ago with the following:

-bought at 160,000

-15 yr fixed loan

-3.5% interest rate

- 1 bd 1 bath condo with 830 sq ft

- I gutted the entire place and renovated everything. New flooring, new kitchen with quartz countertops, new bathroom with new plumbing, added in unit washer and dryer, added better than standard rehab kitchen appliances, converted the place to 200amps from original 100 amps, new plumbing and pipes, etc.

The house has appreciated to about 220,000 in value comparing it to other similar properties that recently sold in the complex. I have about 120k left to pay on the property and 12 yrs left until it is fully paid off.

My question is...is it worth doing a cash out refinance so that I can use that money to buy investment properties?

Thank you :)

Allan Smith · Answer

Of course, it depends on what your goals are, but generally people fall into one of two categories:

• growth mode
• efficiency mode (trim the fat, 80/20 rule, etc)

If you are in growth mode, you'd probably get about a $176k loan (80% LTV) and have $55k to play with.  Buy another and another etc.

If you are in #2, it's about maximum dollar per hour, and a paid off house cash flows like crazy. So you'd leave it.So is it "worth it" you say, well, $55k is a lot to most people, so, yes. But first decide on your goals.

James Baker · Answer

With a cash out refi, you will be paying thousands in closing costs and your rate may go up which will increase your monthly payments.  A heloc is another option that does not have closing costs and can be used repeatedly.

Ken Eck · Answer

I must add, am in no means an expert but you are correct on both.

Since you have a very low rate as it is already, in order to allow the property to cash-flow you may have to refi into a different mortgage type say a 30-yr or an ARM. One key note however, if you refi into an ARM most banks (Freddie and Fannie banks) will limit your LTV to 65% so that is something to consider as well. That would lock up another 5% equity you couldn't touch.

You'd have to work the numbers on multiple options, then include property management fees, capital expenditures, maintenance fees... (BP has a great calculator to use in the tool section). Ultimately renting it out might not be an option, but that isn't necessarily a bad thing.

1031 could be an option if you did decide you wanted to move into the small multi-family properties like a duplex or triplex.

Definitely talking to a professional is your best route as they can accurately run the numbers against all options you may have.

Nicholas Covington · Answer

If this is now an investment property then you will be most likely limited to only 75% cash out. I have not found too many, if any, allowing 80% cash outs on non occupied properties.

Christine G. · Answer

Hey John! Thanks so much for your reply...this was really insightful info! I did wonder the implications of renting out first then refinancing. However, wouldn't refinancing mean now a higher monthly payment? (Cause I would like to keep it at similar terms when I refinance - 3.5% rate at a 15 yr fixed loan, if possible). If I rent out after refinancing I may not be able to rent it out to cover the new mortgage amount.

I have thought about a 1031 but reading into it...I would have to purchase a property of equal or greater value, no? Correct me if I am wrong. I am currently thinking of buying up slightly cheaper properties instead of the 200+ range. Doing a 1031 would force me to look at a higher range, I think.

Ken Eck · Answer

Assuming owner-occupied, 80% LTV cash-out refi being able to draw 55K less closing costs, would be a good idea depending on your strategy, like a few have mentioned. 55K is a decent down-payment for a number of different property options.

If you turn it into a rental property, however, it would be in your best interest to do the cash-out refi well prior to renting out as most banks (Freddie Mac /Fannie Mae) will only allow for a 70% LTV. In this case you'd be losing out on accessing that extra equity. If I am wrong and anyone can speak differently please let me know because I am in a similar situation and would love to find out more.

Have you ever thought about doing a less-option or even a 1031 exchange?

~John

Diana Muresan · Answer

@Christine G. you could refi cash-out at 80% LTV, that's a $176,000 loan and you can use the proceed for a fixer up with Fannie HomeStyle, you only need 15% downpayment, lets say you find a $150K SFR that needs $50K in repairs, your purchase price will be $200K, with 15% down, that's $30K, build 3% in seller credits for closing costs and you can roll the mortgage payments during the renovation into the loan if the house is inhabitable. After the reno you can sell or refi if you plan to hold it. I can give you more info on the renovation loan if you wish

Christine G. · Answer

Hi Diana, I am not sure what strategy to take for my next property...whether it be a flip or a buy and hold. I was hoping to take cash from this home to be able to buy a foreclosure with that and still keep the property.

Diana Muresan · Answer

@Christine G. are you purchasing journals next property as owner occupied or investment? If you purchase as investment and you need to cash out in order to get the funds for down payment, I suggest a regular refi and not a heloc, rate will be similar with the purchase and definitely better terms than a heloc, also Heloc are riskier, they are not governed by the Fannie and Freddie, you are not as protected, also as this year, you can no longer deduct heloc interest on your taxes.

Christine G. · Answer

Allen, thanks for your reply! I would say that I am in growth mode and looking to purchase other properties. Are there other options? I moved to Texas recently so now my property is vacant. Do you think selling would be a viable option as well? Perhaps do a seller financing?

Is Cash out refinancing on this property worth it?

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