Should I cashout refinance my home to free up $ for investing?

Question

Hello I hope this is the right place to post this question, I will try to provide as much detail as possible.

In March 2016 I bought my first home in a suburb of Cleveland, it was a forclosure that I bought for $63,000 and I currently owe around $58,000 on the mortgage.  We fixed up the house and I estimate that it's worth about $120,000 now based on the improvements we made and recent comps from nearby sales.  I'm not interesting in selling/moving from the house for at least a few years but I am looking into purchasing an investment property to either flip or rent. I have found several nearby houses that seem like promising investments. The issue is that I don't have enough cash on hand to make any moves.

Assuming that my estimate of the homes current value is accurate, am I correct in my understanding that I could cash out refinance my mortgage and free up $38,000 (80% of $120,000 = $96,000 - $58,000 = $38,000). Am i doing this right? If so is this a decent option to free up some cash for investment or would the fees/closing costs be too much to make it worthwhile?  Any other feedback/advice appreciated.

Thanks,

-T

Jill Haselman · Answer

@Tyler Kursh I'll weigh in here, as I've literally just gone through all of these options.  Having spoken to many people here on BP, I ended up going to a local bank @AmericanNationalBank here in south Florida (they are AMAZING!) and getting a HELOC.  I control how much I use, so there are endless options to both leverage my own equity and control expenses on debt service.

Thomas S. · Answer

The equity in your home is being wasted, get the HELOC and make your money earn it's keep otherwise. Money should not be hoarded.

Chris T. · Answer

@Tyler Kursh

When you refinance, your closing costs are going to eat up the $38K.

A cheaper way to get access to your equity might be a HELOC. It's easier as well. (just an appraiser cost)

Account Closed · Answer

Short answer is NO.

Your home is something you need to live in.  Keep doing what you're doing as it a roof over your head takes priority over investing and most other things.

The money you invest is money that you don't need.  You don't need it to live, you don't need it to survive, if you get laid off, get sick, etc. you can walk away kicking yourself in the arse with regrets, and start over.

Don't risk the roof over your head to make a few bucks.

Harjeet Bhatti · Answer

You have to deduct closing cost also from net cash.  Do not cash out if you have good interest rate take HELOC if you are planning to flip the new property.

Perry Farella · Answer

Another thought here is to use an Investors Rehab loan called HomeStyle. That way all the debt is on the new investment house on not on your personal residence ( ask yourself what Trump would do LOL).  HomeStyle works on single family investment properties or condos or townhouses but not on multi-units. It is a conventional loan insured by Fannie Mae. You need a 20% down payment on the total of the purchase price plus rehab funds needed. You do have to hire a general contractor to do the work, no "self help". This is a managed process to keep you from getting into trouble basically. It works for 2 important reasons; 1) the future rent is projected that the house will generate and you get 75% of that as extra income to qualify for the mortgage; 2) the future, finished value of the house after all rehab is done, is used as Appraised value to allow you to borrow the funds. Example: old house costs 50k to buy and 50k more to rehab, down payment is 20% of that or 20,000; future value with that 50k rehab is appraised to be 120k. You win. You can flip the house, the lender cant stop you or make you rent it. But rental is assumed so you get the credit or extra income based on Appraiser survey of local rents for similar homes to get the mortgage approved.  All without adding debt on your own house. A Heloc will go up in rate unpredictably, why do that ? I wrote a blog on this called Rehab Dollars & Sense at perryfarella.com.

Jonathon Garcia · Answer

@Tyler Kursh Hello Tyler, I actually work in banking and here where I work we offer something called a  Consumer First Mortgage where the closing cost are only $389, we group your current mortgage with a cash out option and then with a HELOC right now we are offering a rate lock promo for 3.99% for 10yrs, most HELOC's are variable products so if you were to go that route now would be a good time do something like that with the rate lock option. I would stay away from refinancing unless you really do your homework, closing cost in your area are around 6%. Any questions feel free to ask.

Tyler Kursh · Answer

Thank you all for the advice, I will look more into doing a HELOC and will do an analysis first to make sure it's worthwhile.

Ben Wilkins · Answer

@Tyler Kursh - I agree with @Chris T. about going for a HELOC instead of a refinance.

As to whether you should do it or not: it's a balance of debt vs income. Be refinancing or taking out a HELOC, you incur debt on yourself. This is by no means bad, but you need to balance with income from your investments.

Does it make sense to take debt against yourself? What will your new payment be? What will the new income be? What are your investing goals?

Leveraging your own properties can be smart if it is done in a smart manner.

Shorter answer: yes, it is perfectly acceptable to take equity out of your house in order to fund further investments.

Should I cashout refinance my home to free up $ for investing?

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