Using equity in rental property for new primary home mortgage

[Ryan D.]

I'm trying to learn about rental property equity financing. But all the articles I find are about using equity in your HOME to buy a second property or rental property. But what about using home equity in your rental property to buy a new primary home?

Since 2015 I've had a rental unit in Virginia while I lived in CA. I sold my house in CA and am moving back to VA. I don't want to live in my condo so I'm going to buy a new home. I am looking into all my options to include possibly using the equity in my condo to assist in buying the home I want. I know the difference between a cash out refinance vs HEL vs HELOC. But I don't know the particulars and advantages/disadvantages for those options in regards to using it on a rental property, especially during this time with the pandemic and all the new lender requirements. Any insight would be greatly appreciated!

If you need numbers, my mortgage balance for my rental property is $143k and the estimated value is $220k.

[Andrew C.]

Many lenders don't do HELOCs on investment properties, but some do. Assuming typical financing ratios on investment properties, you're capped at 75% LTV, which would allow you to cash out up to $22K ($220K * .75 = $165K - current balance of $143K = $22K cash out poss; some only lend to 70% LTV which would only net you about $11K). If you can find a lender who does NOO/Investment HELOCs, that may be the way to go. You would poss pay a higher interest rate, but generally no closing costs. Being a relatively small balance the difference in interest rate and ability to pay it off sooner may negate the downside to the higher rate (typically tied to prime rate).

Another option is a cashout refi of the rental property/condo. You did not mention the terms of your current loan (rate, how many years into the loan, current payment amount, etc), but cashout refi on Inv properties can get costly on the fees. Aimloan.com has a great pricing quote system that doesn't require any personal info to be submitted.  I just checked that site, with 760+ credit score, $165K loan, 30 year fixed, $4502 in fees/closing costs, at 4.125%, payment of $799.67. In this scenario, you would be paying about $4500 (plus interest) to borrow $22K, netting approx $17,500 (fee analysis is 25.7% up front cost to borrow $17,500; plus regular interest).  

For the above scenario reasons, I suggest a HELOC if its an option. If however your current loan has some crazy high interest rate, or some other reason you were going to refi anyways, then you might consider paying the $4500 and refi.

As far as lender requirements, they are pretty standard DTI 45% generally, and you'll probably have to show up to 6mo cash reserves for the loan. In general, if the property cashflows for you, and you will still cashflow with the new loan, and you have decent credit, W2 income, etc you should be fine with either refi or HELOC.