Should I cash-out refinance my current home or use some cash ?

Question

I want to buy a new home and rent the current home. Should I cash-out refinance to get the 20% down on the new home or should I use cash for 10% down? Which one would be more beneficial. My current home is valued at $220k my balance is $100k with 13 years left on the mortgage. I am planning on buying the new home where about $25k of repairs/updates are needed and plan on living in the new home for at least 1 to 2 years. After that period the idea is to buy a nicer/better home and move there possibly on a permanent basis so if I don't cash-out refinance now, I can do that later and use that money as a down-payment for the third home. But if I cash-out refinance now, I would also have to cash-out refinance the second property later for a down payment on the third.

I am not sure which route is a better choice?

thanks for any input

Tom

I am not sure which route is a better choice?

thanks for any input

Tom

Tom Smith · Answer

Thanks Zack........

Zack Karp · Answer

@Tom Smith easy slam dunk answer, if you want to buy more properties, cash out refi with a 30yr fixed and pull out as much as possible.  Then buy the next property with 5% down since it will be a primary.  Then after you house hack it for a year, then buy the next primary property with 5% down too.  Meanwhile, feel free to use all that extra cash to buy another investment property or two, and/or have money on hand for rehab too without costly hard money loans.  Use that cheap mortgage financing to your advantage and build your empire.

Best of luck!

Rob Massopust · Answer

1st question where are you located?

Is your market growing or contracting [market top]?

What are your long term objectives, to own a new home or build rental portfolio. Or both.

How is your credit and income?

If you want to own a rental and a new home you have alot of options.

The equity in the current home is untapped and you can get enough to get a down payment, will this property still cash flow after the new loan, or what is the threshold to shoot for.

Every time you refi you lose equity 2-3%, but if you can get a better rate and cash out that is a good way to go. I would look at a heloc vs a full refi because you are paying that 1st mortgage off much faster than a new one, you basically reset the clock.

You could also sell it and get all the proceeds [$250k to $500k depending on marital status] tax free assuming its your principal residence. You can also hold for another 2 years then do a 1031 exchange - but that is for another question.

Other question how much do you have to buy another home? You said it needs about $25k in rehab. How much do you have for a down payment.

If you can swing 5% down you can get a FHA or better yet a Fannie Mae Rehab loan that is one loan for purchase and funds to rehab. FHA is 3.5% down and you can do an FHA 203k Streamline loan for purchase and up to $35k for rehab pretty easily.

Then you buy the property, rehab it, wait one year and refi - you should have enough equity to refi out of the PMI.

Look at my last post here, talks about a BRRRR variation that might apply. It mentions adding a guest unit [not applicable to all markets but worth looking at]https://www.biggerpockets.com/forums/61/topics/732543-here-is-my-adu-variation-to-brrrr-its-called-bra2xrr

Andrew Postell · Answer

@Tom Smith these are really good questions to be asking but it might be really hard for us to truly tell what is best for you in this type of a setting.  What if your current mortgage has an incredible rate?  Then it might make more sense to get a HELOC and keep that first rate in place.  When refinancing to a cash out loan that mean you would have to roll in the first loan...so if you had a good rate, you will be forced to carry the new rate on the entire balance.  And what if it takes you several months to find a new home?  Then you are paying that interest for several months...whereas a HELOC won't make you pay interest until you draw from it.  I do believe that either refinancing while you live there or taking a HELOC will both be better to do while you are occupying the property but without knowing credit score, finances, etc.  it might be difficult to say.  Reach out to a mortgage professional in your state to find out the best options. If you don't know one, Bigger Pockets has great state forums that you can post in and a good local person should be able to point you in the right direction as well.  Hope this helps!

Jordan Decuir · Answer

@Tom Smith I am not a lender but it may be easier and you may get a different (possibly better?) rate and terms if you do the cash-out refi on the current home because it is “owner-occupied” instead of it being a rental.

Tom Smith · Answer

Current mortgage is $1170 per month,  my agents is saying that it will rent for $1650-1700 no problems.       Should I refinance and take a 30 year loan on it my math shows that it would still be approx $1200 per month in mortgage payments...

Taylor L. · Answer

Will your current home cash flow as a rental if you refinance? If so, how much per month, after accounting for repairs & capex?