Cash out refinance to pay off credit cards

[Aaron Frances]

Hi Everyone,

I converted my 2-flat apartment building into a legal 3-flat using a cashout.

Appraised at $425k, new mortgage at $2330 at 4.35% currently owe $305K now.

Property may conservatively appraise at $525k according to realtor I may have gained $100K with adding a 3rd apartment to my property. Comps seem to be selling higher in my area.

Current FHA quotes a 2nd cashout loan at 3.375% with $11k in closing fees with 7k of it being FHA fee. Mortgage would go up from $2330 PITI to $2839 PITI at$420k 30 year loan.

Conventional came back at 5.9% which would make my mortgage $3100-3200 a month PITI.

I under budgeted for the rehab and am now left with $100k in loans and credit debt at an average rate of 13.35%. We live in one of the units so we are saving $1700 a month not paying rent elsewhere and are still receiving $500 dollars in cashflow after receiving rent from the other two tenants. It kills me to pay out $2350 a month in credit cards with interest when i'm sitting on a possible equity of $200k+. We plan on taking out $99K cash out to pay $65K in credit cards so my wife's DTI can look good when we go for our 2nd property. The $34k in installment loans would remain under me as I'm the mortgage holder of this house at a avg rate of 9%. We'll use the remaining $34k from cash out as down payment for another 3-4 unit property possibly using FHA. I'm just curious if we are approaching this the right way. I'm inheriting a bigger mortgage that the tenants will cover when I move out just so I can have piece of mind that we don't have our money being wasted in finance fees. I feel like the finance fee's are canceling our current cashflow and the payoff calculator we are using for the Credit debt reads 7 years if we keep using our avalanche paydown method to the tune of 43k in interest paid over 7 years. I just want to be free and clear so when we move to the next property we can concentrate on the cashflow business side vs the juggling of the credit card payments. Thanks in advance everyone.

[Cassi Justiz]

I would try to get that credit card debt paid off ASAP. Sure a cash out refi could be great, but taking secured debt to paid unsecured debt really will put you in a potentially risky situation should anything happen where you are unable to maintain your payments. Also, a cash out refi will put you in a lower cashflow position for the entire duration of the loan, so I would be very selective about what you put that equity towards. 

Cut all of your expenses as low as you can and look into moving the credit card debt into a 0% interest balance transfer card or account. You may have to do this a time or two to get the balance paid off in full, but there is no reason to pay interest on credit cards. There are a ton of websites with info, but here is a quick comparison of some of the cards with good promos right now. 21 months of 0% interest should get you to a really good place if you are pumping as much cash into that balance as you can. Cut down your spending as much as you possibly can, pay as much as you possibly can towards your credit cards and get that debt paid off ASAP (and definitely get it paid off before trying to buy anything else else)! 

https://www.nerdwallet.com/balance-transfer-credit-cards

If you haven't listened to the BP Money or ChooseFI podcasts, you should check them out. They have a lot of good info about debt pay off and accelerating that process. 

[Joe Splitrock]

@Aaron Frances just be careful to follow IRS tracing rules when taking cash out or paying off credit card debt. You should always use a dedicated credit card for business, so there is no intermixing of personal and business debt. You will want to keep statements to prove you are not using the proceeds to pay off personal debt.

Interest from cash out refinance need to be traced to use. So if you take $50,000 out of property A to buy property B, you claim interest on the $50K on property B - even though the loan is against property A.

It is even more convoluted when you live in the property. You can only deduct interest on the portion of the loan that is for the rental property. In a three unit property if the units are equal size, only 2/3 would be deductible. 

You were throwing around a bunch of numbers. I would have a CPA look at this.

[Andrew Postell]

@Aaron Frances the interest you pay on your mortgage is tax deductible.  The interest you pay on your credit cards is not. While I'm not a fan of taking a credit card debt and paying it over a 30 year loan, it is likely that your minimum payment on those accounts is structures to a 20 year payment.  So it's not THAT different. If you combined it into your mortgage.  Now, I can't see any of your other finances, what your household income is, what other goals you have coming up, nothing.  I can just read your post and provide financial advice.....so we need to get you in front of someone who can provide you with this advice.  And it sounds like the lenders you went to could not provide this....otherwise, why would you go to the internet searching for the answer?  I don't mean this is a harmful way, I mean this in a financial advise way.  We need to examine your Net Cash Flow before and after.  We need to examine if you can comfortable keep making the payments to those credit cards too.  If so, maybe just consolidate and make that payment on your mortgage and see how quickly you can pay it off.  We need to also examine what your 3-6 month "emergency fund" looks like.  We need you to have the ability to analyze all of this data and more.  Lots and lots and lots of other things to consider here.

The point of this website is for real estate investors to speak with other real estate investors.  If you own 47 properties one day, have $170,000 in property taxes each year, insurance bills, maintenance bills, bills coming from every vendor that it takes to run your empire, your being pulled in every direction financially.....can you make good financial decisions in that situation?  What you are facing now is your first test.  Get good at what you are facing - right now.  Study up on it, face it, and make a good, informed decision.  Ensure you don't face it again.  Otherwise you will be doomed to repeat it and you will never be what is in your heart - to be truly successful.  I have faith in you that you can do this.  We look forward to hearing a great post from you in the near future.

[Harjeet Bhatti]

@Aaron Frances Have you tried line of credit or HELOC on this property before you spend that much money in closing cost?

[Aaron Frances]

@Harjeet Bhatti Hi and thank you for your reply. My mortgage holder does not allow Heloc's, only refinances. Is there another way to do a Heloc if i'm going through another lender? I'm not familiar with that process. 

[Harjeet Bhatti]

@Aaron Frances You can apply anywhere for HELOC. I can send you local lender list.

[Aaron Frances]

@Cassi Justiz, Hi Cassi, thank you for your reply everyone! Its nice to see the different view points of others who are in the industry. I caught the bug watching Brandon Turner and other investors talking about leverage and it made me want to jump the gun and speed up my debt pay off. The advice on the tax implications and the importance of meeting with a CPA are highly appreciated. I have a meeting with one in a few week and will see where that goes. In the mean time i'll keep looking at other areas to possibly cut expenses even more so I can continue working on a pay down the old fashion way. I'll be sure to keep you all posted on where I land as I trust many newbie investor find them selves in this scenario their first time around. Thanks again everyone. 

[Nnabuenyi Anigbogu]

@Aaron Frances In my opinion, the best way to go is a heloc as stated earlier by another answer. It gives you the flexibility you need without all the closing costs associated with a cash out refinance. I actually recently completed a HELOC on one of my 3 flats with a lender that lends up to 100% LTV (owner occupied). If you truly have the equity you believe you have, that will give you 200K+ of cash available via the HELOC. The best thing is that you can pull only what you need as you need it so that you are not paying interest on the rest. So if you got approved for a 200K line, you can pull 65K at closing to pay off all the debt in your wife's name. The rest just sits there until you are ready to use it. The rate on the HELOC is about 6% (1.9% 9month intro rate) so it will be cheaper than the rates on the installment loans as well if you decide to pay those off. Then whenever you find a second property you can pull the downpayment from the HELOC. The best thing is that you dont pay any interest while you are waiting. It only accrues when you actually pull the cash unlike a cash out.

The only reason i can see to do a refinance right now is if your current loan is an FHA loan and you are looking to free up the FHA to use for another property. In that case you have to see if the numbers are worth it. I refinanced mine out of FHA into conventional prior to doing a HELOC so that i would have FHA available if i wanted to use it again. Also if you go this route, there is nothing that says you have to do a cash out refinance (cash out closing fees are astronomical in my opinion). You can do a rate and term into conventional to keep your payment the same or lower than it is now (especially if you currently have PMI which will be removed based on your equity). Then use the HELOC to pull out the cash you need after the refinance closes. If it appraises like you expect, you can actually use the same appraisal to apply for the HELOC so you dont need to pay for a second appraisal (that's what i did).

Let me know if you have any questions on the above. I believe that is the most flexible way to go about it.

[Rory Boone]

I would be interested in that list. Could you please send it to me? Originally posted by @Harjeet Bhatti:

@Aaron Frances You can apply anywhere for HELOC. I can send you local lender list.

[Aaron Frances]

@Harjeet Bhatti, Hi Harjeet. Can you share with me your list? Thanks.