Mortgage options to fund our 1st rental property

[Jessie Fanchiang]

Hi All, 

My husband and I have been on BiggerPockets for two years, trying to prep ourselves for our first rental property inventment. now the real opportunity is here and we sure feel that we still don't know enough!  So thank you all for your time reading and kind input in advance!  

We are looking at properties at around 500K-550K.  we have 150K cash to use.

After contacting several brokers, we have two options to fund the investment property:

1. Use 25% down +$450K preapproval letter to shop.  and do a conventional loan of 3.5%, 30 yr. 

2. Our primary resident property can cash out $600K after deducting the outstanding $190K loan on the primary property at 3.5%, 30 yr also. the loan broker suggested us to have a second mortgage against on the primary property instead, and payout the investment property.  The argument was the 100% interest for tax deductable on the primary property, and also a cash offer is stronger.  

We are leaning toward option 2 at this point  but I'd like to see if there are any downsides or things we should be aware of with option 2? 

Thank you very much  

Jessie