Suggest a Funding / Timing Strategy for my Situation

[P M]

Greetings- here's my situation.

I live in a townhouse with a tremendous location in a college town. I am about to refinance it from 6.875% down to 4.875% and cut my monthly payment by over $200.

Then I would like to buy another house down the street, move into it as our primary residence, and rent out the townhouse.

Here's our dilemma: we need to figure out how to get through the transaction. On the other side of the purchase of the second house, we save enough income each month to cover the two mortgages even if we don't rent the townhouse.

Some details:

Townhouse- when refi'ed, will be $120k loan, 30-yr fixed, at 4.875%, monthly payment P+I = $635.05
Townhouse monthly taxes = $155
Townhouse monthly insurance = $21
HOA Dues = $120
Prop Mgmt Fee = $85

Monthly rent = $850

Desired New Home

Likely purchase price = $260,000
Mortgage rate 5.1% (???) for 30-yr fixed
P+I = $1,222
Taxes = $374/month
No HOA

I have $16,000 in liquid assets right now. I will likely liquidate $2700 on the townhouse refi, bringing me down to $13,300. I don't want to be completely devoid of cash- maybe I'd use $10,000 of this money?

I could also theoretically get a HELOC from my credit union up to 90% LTV of the townhouse. This would get me about another $10-12,000. However, the second house will probably require close to $30k in closing costs and down payment even if I get a 90% LTV on the house.

How would you find an extra $10-15k to get through the transaction period?

[Jon Holdman]

A rental that gets $850 a month in rent with a $635 P&I payment is a terrible rental. Read in the Rental Property forum about the real expenses, aka the "50% rule".

Rent: $850
Expenses: $425
NOI: $425
Payment $635
Monthly loss: $210

Just the expenses you list amount to $381, and you're sure to have maintenance (mostly caused by your tenants) and vacancy.

Why in the world do you want to keep this as a rental? If you want a new house, sell this albatross.

If you buy a new house, you should count on at least 10% down. So, that's $26K you'll need.

Doesn't sound to me like you're in a good position to buy this new house, to be honest. The new lender will make you qualify for both loans, and will not include the rental income to compute your DTI. You can only use that after its been a rental two years.

If you want to buy this new house, sell the townhouse and roll the equity into the new one. Sounds like its worth about $145K, which I assume you mean that's what you could sell it for today. You'll pay between 8% and 10% to sell it, depending on what seller concessions are required. I think you currently have a $115K balance on the townhouse, since there will be costs to do the refi and you say the new loan will be $120K. So, if you sell for $145K, net $130K after costs, and pay off your $115K loan, you'll have $15K, less taxes. Should be none, assuming you've been there at least two years. Between that and the cash you have, you have enough to buy the new house. Barely. But if you could really afford both loans, save the money you would be losing on the rental and you'll have some cash soon.