How do I pay off LOC without refinancing existing mortgage?

Question

Hi Everyone! I recently finished up my first SFR rental property in Fayetteville, NC. I purchased the house using a 15 year term 7/1 ARM  at 3.85% APR. I financed the rehab using a 7.5% Interest Only Line of Credit. The property and loans are in an LLC and need to be kept that way because of restrictions in my current W2 job. How can I pay off the line of credit while still keeping the original mortgage?

Best estimate is 80% LTV when you include the LOC. I say estimate because I have not had the property reappraised since the rehab was completed and I am using recently sold home prices as my benchmark. Also, it has been 6 months since I purchased the property and I have had it rented for two months.

Jeff Copeland · Answer

Your W-2 job prevents you from owning or financing real estate? I'm not doubting you...I'm genuinely interested.

One possibility is to seek what essentially amounts to commercial financing from a local banks/portfolio lender. Though there might not be much of an appetite for that type of loan in the post-pandemic credit market.

Another possibility is to find one of the few lenders who will do a conventional-type loan product to an LLC. Finance of America was doing them for a while, and they required a lot of red tape. But again, they may have tightened their belt for the same reasons as conventional lenders.

A third possibility is to look into an income-based or asset-based loan product specifically designed for rental properties. The terms are usually not that great compared to conventional financing. But you seem to have already ruled out conventional.

Brian Leigh · Answer

@Andrew Croley The LOC balance is currently $25,000. I would like to reuse the LOC for future rehab on other properties. Simple numbers is I have about $100,000 in the property and the ARV is $124,000, which is right at the 80% LTV mark.

Brian Leigh · Answer

@Perry Farella This is my first and only property. I use the LOC to rehab and would like to use it on the next one too. I don't have the equity in my primary residence at the moment to pay off the LOC. I will look into the Home Style loan for the future. Thanks.

Andrew C. · Answer

Sorry Brian, but why would you want to pay off the LOC?  Without doing a refi on the 1st mortgage, or unless you have another source of income or equity, I'm not sure how or why you would do that.  How much is the LOC you're talking about?

Is your motivation to pay off then re-use the LOC for another investment?

I wrote the below comment when I missed that it was in an LLC and you wanted to keep it that way...if it helps I've included my original response below but may not be totally relevant to an LLC situation/commercial lending:

Sorry Brian, but "15 year term 7/1 ARM at 3.85% APR" doesn't sound like that much of an amazing deal these days.  You should be able to get 15 year fixed in the mid-high 2's or low 3's.  I just refi'd in December, cashout refi for 3.375% on an investment property, 75% LTV conventional mortgage 1st lien, so nothing fancy.  I don't know what the loan balance is and if the 5% difference from 75-80% LTV is really a big deal to you, perhaps you could just bring cash to pay off that 5% difference and have an even lower rate 30 year mortgage.  If so, you can always just make extra payments to principal and still have it paid off in 15 years, BUT you would also then  have the flexibility to NOT pay the 15 year payment amount (vs 30 yr amount) if times got tight, AND when it comes to financing your next property, they'll calculate your DTI based of your minimum required payments, in which case you want the lower 30 year payment to show on your credit vs the higher 15 year minimum payment.

IF you are talking about a manageable amount to pay down the extra 5% to get to a conventional 75% LTV, I would go that route and do a conv refi.  If you are struggling for that 5% consider creative options like cashout refi on a car that's paid off, credit card advance, personal line of credit (typically pretty easy to get $10K lines) or personal fixed loan.  For the price of an appraisal, you can start the loan process on the refi, if the house value doesn't come in where it's manageable to pay down to the conventional 75% LTV, you're only out the roughly $400 for an appraisal.

Brian Leigh · Answer

@Jeff Copeland I spoke to a commercial lender the other week. Currently, they were offering 70-75% LTV with rates above 6%. He advised that I would be better off financially finding a way to pay off the LOC because the 15 year first mortgage was one of the best he had heard of in a while. I can hold out for a little bit to see if the commercial lending market improves. I have a broker friend who works with Finance of America, so I will reach out to him. I don't know if FoA works in NC though.

How do I pay off LOC without refinancing existing mortgage?

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