Refinance/HELOC on a Seller Finance Deal
Social Media Lead at BiggerPockets · Phoenix, AZ · Member since 2021 · 40 posts · 10 votes
Refinance/HELOC on a Seller Finance Deal
4 Replies
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
You would normally refinance in order to pay off the seller and put long term financing in place.
For example, let's say you seller financed $100k for 5 years, interest only, on a property that is now worth $150k in year 5.
For an investment property, you can refinance at up to 75% LTV ($150k x 75% = $112,500).
So you take out a new mortgage with a balance of $112,500.
You have to pay the seller the $100k you still owe him on the first mortgage (this happens at closing of the refi, so that the new mortgage is now in first position).
You pocket $12,500, minus closing and origination costs.
The seller is paid off, and now you start making payments to your new lender, often with a 30-year fixed rate fully amortized loan.
For a deeper dive, see https://www.biggerpockets.com/...
A HELOC is really only for owner occupants (as a general rule, banks don't do HELOCs on investment properties). But for the sake of this explanation, let's assume this is now your primary residence. Many banks will do a higher LTV on a HELOC, some up to 90%.
So let's say that a year after the above refinancing, you owe $110k on the new mortgage, but the house is now worth $165k.
$165k x 90% = $148,500.
Minus the $110k you owe on the first mortgage, you have $38,500 in equity you could potentially tap with a HELOC at 90% LTV. So if you put a HELOC in place, your debt would look like:
$110k first mortgage
$38,500 HELOC (second mortgage)
The nice thing about a HELOC is it doesn't cost anything until you use it, and it's there when you need it.
Assuming your DTI and credit score allow for it, you could pull out $38k from your HELOC and use it as a 25% down payment on a new $152k investment property.
Copeland Morgan LLC4.770 Reviews - Social Media Lead at BiggerPockets · Phoenix, AZ · Member since 2021 · 40 posts · 10 votes3y
Quote from @Jeff Copeland:
You would normally refinance in order to pay off the seller and put long term financing in place.
For example, let's say you seller financed $100k for 5 years, interest only, on a property that is now worth $150k in year 5.
For an investment property, you can refinance at up to 75% LTV ($150k x 75% = $112,500).
So you take out a new mortgage with a balance of $112,500.
You have to pay the seller the $100k you still owe him on the first mortgage (this happens at closing of the refi, so that the new mortgage is now in first position).
You pocket $12,500, minus closing and origination costs.
The seller is paid off, and now you start making payments to your new lender, often with a 30-year fixed rate fully amortized loan.
For a deeper dive, see https://www.biggerpockets.com/...
A HELOC is really only for owner occupants (as a general rule, banks don't do HELOCs on investment properties). But for the sake of this explanation, let's assume this is now your primary residence. Many banks will do a higher LTV on a HELOC, some up to 90%.
So let's say that a year after the above refinancing, you owe $110k on the new mortgage, but the house is now worth $165k.
$165k x 90% = $148,500.
Minus the $110k you owe on the first mortgage, you have $38,500 in equity you could potentially tap with a HELOC at 90% LTV. So if you put a HELOC in place, your debt would look like:
$110k first mortgage
$38,500 HELOC (second mortgage)
The nice thing about a HELOC is it doesn't cost anything until you use it, and it's there when you need it.
Assuming your DTI and credit score allow for it, you could pull out $38k from your HELOC and use it as a 25% down payment on a new $152k investment property.
Thank you so much, it makes total sense. So I can simply go to any local/small bank of my liking and investor-friendly and refinance the property?
Lastly, do closing costs and origination costs go to the seller (bank) or how does that process work?
- 3yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votesEssentially, yes. There is nothing particularly "investor friendly" about a refinance. It's one of the most common loan products offered by banks and mortgage brokers. Just shop around for the best rates/terms and customer service.
Closing costs of a refinance may include:
--Origination costs (to the lender)
--Fees for title work and closing the loan (to the title company)
--Recording fees and taxes on the mortgage (to the state)
--Prepaids/Impounds for taxes and insurance (to your escrow account) - Not really a "cost" at the time, but will still be part of the overall settlement.
--Costs for services such as the appraisal, lien search, etc. (to the service provider, or may be settled at closing)Copeland Morgan LLC4.770 Reviews - Social Media Lead at BiggerPockets · Phoenix, AZ · Member since 2021 · 40 posts · 10 votes3y
Quote from @Jeff Copeland:
Essentially, yes. There is nothing particularly "investor friendly" about a refinance. It's one of the most common loan products offered by banks and mortgage brokers. Just shop around for the best rates/terms and customer service.
Closing costs of a refinance may include:
--Origination costs (to the lender)
--Fees for title work and closing the loan (to the title company)
--Recording fees and taxes on the mortgage (to the state)
--Prepaids/Impounds for taxes and insurance (to your escrow account) - Not really a "cost" at the time, but will still be part of the overall settlement.
--Costs for services such as the appraisal, lien search, etc. (to the service provider, or may be settled at closing)Thanks again! Great in-depth article by the way.
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