How to cash out

Question

A bit about what I'm looking for:

I'm closing on a property soon with a cash offer. I have no immediate plans for the money I'm spending on the property, but I'd like to keep cash available so I can jump on any good deals that happen to pop up without having to secure financing first.

I was originally planning on doing option 1 below, but then I looked at the actual loan costs+details, and the mortgage broker I was going to use made quite a few mistakes on the loan application (no, it's not a primary residence...). They didn't seem to think it was a big deal, but I'm not inclined to trust them very far anymore.

I'd like to avoid escrow accounts, since I'd rather keep track of how much taxes and insurance is myself, than trust the bank to screw with my payments and possibly mess up my cashflow. I'd like to keep fees to a minimum, since that's money I won't see again. One problem with the conventional mortgage route was I'd be paying about 50% of my borrowed amount up front (down payment + fees + prepaids), and, while I understand the 25% down payment, an additional 10% in fees+prepaids seems a bit excessive.

What I know of my options:

• Conventional mortgage that closes before the cash offer closes. 
• Delayed Financing
• Cash out Refi
• Line of credit against the house

Did I miss anything? Which would fit my needs best?

Wes Brand · Answer

Small update:

Decided to go with a HELOC. I found a bank that will do one on an investment property for 70% LTV, no closing costs adjustable to prime + 2%, max +/-4%/yr, no yearly fees, no other fees (they'll send an inspector but they won't charge me for it, etc)

Dean Weltman · Answer

I'd say LOC. I don't like paying interest on money I don't need. Everything else is close enough that it's a wash...

Wes Brand · Answer

Not to double post but...

It seems my options are the following:

• Refi / mortgage, fees: 2800, LTV: 75%(~64k out) (30 year fixed at 4.65%)
• Line of Credit, fees: 1800, LTV: 60% (~51k out) (10 year adjustable at 4.629%)

I could save a thousand on fees, but it means I end up with 13k more equity locked away in the property...The advantage to the line of credit is that I'm not paying interest on the money until I actually need it, and the interest rate when I do is close to the same (until it adjusts up). The rate can adjust by a max of 2% once per year, and to a max of 11.529%. I plan to use the money as cash for a new property which I then refi, so I don't foresee leaving the money in the line of credit unpaid long enough for the interest rate to matter.

Which would you choose? How do I analyze this?

Wes Brand · Answer

A commercial LOC is an interesting idea. I'll look into it, thanks. I don't currently have an LLC setup for this property. My biggest problem is not seasoning (I have more than enough income to qualify without help from the property) but the closing costs and fixed fees associated with the mortgage, so maybe that will come out to better terms (I'd be more comfortable if the fixed fees were in the ~2% of borrowed amount range, not ~4% range)

Percy N. · Answer

@Wes Brand, the option I would look into is a Commercial LOC, since this is an investment property.

You also will not have seasoning requirements that the conventional mortgage banks will require.

Try a smaller portfolio lender, which will let you roll that LOC into a refinance without additional  (or with minimal) closing costs.

Jerry Padilla · Answer

Sorry,

I meant purchasing property below market value.

Wes Brand · Answer

The loan amount is ~60k. The up front money I need to for the loan is ~30k. (Or, I'd be able to pull 60k out of the property, and leave 30k in it or fees). My bank won't touch it because they don't want to deal with loans that small...probably for this reason.

Would a line of credit against the home be a better option?

What is 'instant equity'?

Jerry Padilla · Answer

@Wes Brand

Many times mortgage brokers charge additional fees and have additional overlays so they can make their their money and have several options for you. For example; Many times you need a 2 year history of rental income, which in fact you don't for a conventional mortgage, but it is a common overlay and misconception in the industry.

It depends on the loan amount you are borrowing as well. Many fee's are standard no matter the loan amount, so the percentage will depend on the actual loan amount.

Interest rates are low now. I always recommend a fixed interest rate, as we don't know where rates will be 10 years down the road. Right now we do know they are low. I recommend a conventional cash out, as it is a fixed interest rate. If you are purchasing a house that has instant equity, or you plan to put money into right away. You can pull out up to the purchase price and closing costs prior to 6 months, based on appraised value. This can technically, get you into a property with little money into it, after the refinance so then you can repeat.