Beginner Questions re: Refinancing

[Ryan H.]

Hi all, I'm considering refinancing and am having some trouble clarifying what terms to pursue.  I'd be interested to hear your feedback regarding my circumstances:

Background:

- I'm a new real estate investor with one rental (SFH). It cash flows about $350 per month. I'd like to buy a second rental.
- I'm self-employed, but I'm generally not able to meet my personal and business expenses via my self-employment income alone.
- I also have a debt obligation to the IRS totaling $10k and at an interest rate higher than what I imagine I could obtain through a cash-out refinance.
- I have enough cash in an Inherited IRA to put towards a down payment for a next rental property. However, that money is taxed once distributed.
- Equity in my primary is 63%.  Equity in my rental is 30%.
- Interest rate on existing loan for the primary is 4.375%.  Interest rate on existing loan for the rental is 4.124%
- Great credit.

Questions that are up for me:

- Should I refinance one or both loans?
- Should I be considering a rate-and-term or cash-out?  If cash-out, how much?

My sense is that I should do a cash-out refinance on the existing loan for the primary to pay off my debt obligation and put the remaining amount towards a down payment on another rental.  And maybe a rate-and-term refinance on the existing loan for the rental.

Thoughts?

[Michael Henry]

Hi @Ryan H. Will you even qualify with having that IRS lien? If so, you will probaby get the best terms and rate by pulling the equity out of your primary home, you can go up 90% LTV. I believe rate and term, and cash-out or interchangeable. I think you mean cash-out refinance or Home Equity Line Of Credit (HELOC). The cash-out refinance you will pay your principal and interest (P&I) right away, so it is best to know what you are doing with the cash. On the other hand, the HELOC is interest-only payments on the principal that you withdraw. The interest rate can vary. After 5 years the principal balance is amortized over five years. This opinion makes the most sense when you don't know what you will be doing with the cash or you want better cash flow during that 5-year period.

The amount you will take out depends on much you need and how much the bank (credit union) will give you. It sounds like your goal should be to increase your cash flow. 

I hope this helps.