Primary cash out refi, HELOC, other first time investor options

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Primary cash out refi, HELOC, other first time investor options

Ryan Guffey
Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes

I'm looking to start investing in the Kansas City area. I was looking to refinance my primary residence before I started looking at real estate. Now I'm looking for the best way to start investing, here are some of the options I was curious about. Would it be better to:

Refinance and potentially save 300 a month and save up for my first investment property?

Cash out refi and use that as an initial down payment?

Look into a HELOC?

Or are there other alternative financing options that would be better to look at first?

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Pete M.
Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
6y

@Ryan Guffey There are a lot of variables that go into any decision, as you can imagine, and those will vary from person to person. With rates being near historical lows, now may be a good time to refi your primary, but you also need to consider how much you stand to gain from doing a cash-out refi (limited to 75% LTV) vs a rate/term refi (80-85% LTV). Rate/term refi won't get you any more cash up front, and may even mean you have to pay some cash to close; you could then couple this with a HELOC. A HELOC is a good way to tap into that capital in the property, but you'll be paying interest on it while the money is out, so you'll need to factor those costs into your returns and strategy.

What do you think your primary is currently worth, how much do you owe on the mortgage, and what's your current interest rate?  How much cash do you need to get started?

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  • Pete M.
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    6y

    @Ryan Guffey There are a lot of variables that go into any decision, as you can imagine, and those will vary from person to person. With rates being near historical lows, now may be a good time to refi your primary, but you also need to consider how much you stand to gain from doing a cash-out refi (limited to 75% LTV) vs a rate/term refi (80-85% LTV). Rate/term refi won't get you any more cash up front, and may even mean you have to pay some cash to close; you could then couple this with a HELOC. A HELOC is a good way to tap into that capital in the property, but you'll be paying interest on it while the money is out, so you'll need to factor those costs into your returns and strategy.

    What do you think your primary is currently worth, how much do you owe on the mortgage, and what's your current interest rate?  How much cash do you need to get started?

    3Reply
  • Chris Teti
    Realtor · Southern NJ · Member since 2017 · 188 posts · 68 votes
    6y

    Hi @Ryan Guffey, I always prefer a HELOC to a cash out refi, but like Pete said, you can consider a refi if it will save you $$ and is worth it for you independent of any REI you are considering. I also prefer my HELOC to be a backup option for my investing and use unsecured business lines of credit as my primary gap funding option. Using the unsecured business lines of credit allows you to keep your personal credit profile protected even if you are using the funds where a HELOC will negatively impact your DTI, which is a common criteria for most lenders when approving you for a loan (ie mortgage).

    2Reply
  • Kim Tucker
    Flipper/Rehabber · Kansas City, MO · Member since 2011 · 2k+ posts · 712 votes
    6y

    Buying the house subject to the existing financing - little cash needed.
    Buying with seller financing - little cash needed.
    I spoke with a hard money lender yesterday that funds a lot of investors with hard money so they can buy now - with 100% financing, do some minimal things, and then in 3 to 6 months refinance and get their money back.

    I think you will find another person here on BP who owns a lot of doors in KC, who buys rentals with Private Money, rehabs, rents them out, and then refinances.

    All variations of the BRRRR strategy that requires very little of your own money, it does require you to buy it right, and but no money needed.

    3Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Pete M. I see, I think a rate/term refi coupled with the HELOC might be a better option for me currently along with checking on other options.

    I think it is currently worth 140-150k and I owe approximately 114k with a rate of 4.375% when I talked to my lender i could get at least 3.5% and drop the PMI of or get it lower with a regular refi. Im not sure on the cash to get started yet. Trying to get my financing planned out first before to determine what range I should look in

    1Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Chris Teti Gotcha, ill have to look into the unsecured business line, I don't know enough about them. But it sounds like it could be beneficial

    0Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Kim Tucker Could you explain or direct me to more info on selling subject to existing financing? I'm not fully sure on the seller financing. I get hard money but I was hoping to wait until I know more what I'm doing before trying that.

    0Reply
  • Pete M.
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    6y
    Originally posted by @Ryan Guffey:

    @Pete M. I see, I think a rate/term refi coupled with the HELOC might be a better option for me currently along with checking on other options.

    I think it is currently worth 140-150k and I owe approximately 114k with a rate of 4.375% when I talked to my lender i could get at least 3.5% and drop the PMI of or get it lower with a regular refi. Im not sure on the cash to get started yet. Trying to get my financing planned out first before to determine what range I should look in

    I don't think you have enough equity to make a cash-out even possible, to be frank, so a rate/term refi is probably your best bet. You may be able to find a HELOC to free up some cash, but it likely won't be a ton right now with the market uncertainty. In any situation, a refi to lower your interest seems like a no-brainer. Shop it around and see what you can find for rates and fees... I just got my primary refi'd at 3.15%, and I know others who've gotten into the 2s.

    0Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Pete M. Yeah i thought I had more in it. I'll try the rate/term refi and see how that goes and I'm lookimg into some more of the options that Kim mentioned

    0Reply
  • Pete M.
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    6y
    Originally posted by @Ryan Guffey:

    @Pete M. Yeah i thought I had more in it. I'll try the rate/term refi and see how that goes and I'm lookimg into some more of the options that Kim mentioned

    Kim's options are good, but you can also consider partnering with someone.  They bring the capital to the table, you bring the time and expertise, maybe?  More food for thought.

    1Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Pete M. I considered that the only issue is I don't have the expertise and I work full time so time is limited lol. I was hoping to bring some money and someone else have the expertise to learn from.

    0Reply
  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    6y
    Originally posted by @Ryan Guffey:

    @Pete M. Yeah i thought I had more in it. I'll try the rate/term refi and see how that goes and I'm lookimg into some more of the options that Kim mentioned

    I would do a HELOC. Find a local bank. Then buy a duplex with your extra cash in kcmo. How that helps.

    0Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Alex Olson I would like to but idk if I will be able to get enough with the HELOC to get a duplex yet

    1Reply
  • Jimmy LieuBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
    6y

    Hi all,

    I am learning more about refinancing myself. I am confused about when to do a rate-and-term refinance. I understand that a lot of people are talking about doing refinances right now to get a lower interest rate and reduce their mortgage.

    However, wouldn’t it be bad because your 30-year loan would be reset and you would have to start from the beginning again? Therefore most of my mortgage will be going towards interest rather than principal?

    Could someone clarify this for me? How would you be able to calculate if the lower interest rate or term would be worth it in this case?

    [email protected]614-300-7535
    Jimmy Lieu, Red 1 Realty4.9120 Reviews
    WebsiteView Page
    1Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Jimmy Lieu Im pretty new with it myself but I believe you can calculate it with

    (interest rate/number of payments) * principal = interest

    So for me I believe I'm at (4.5%/12 payments a year)*120,000 = 427.5 monthly interest repayment

    Then if I do 427.5 * 300 months left = 128,250

    If I refi and do (3.5%/12 payments a year) * 120,000 = 350 monthly interest repayment

    350 * 360 extended back to 30 years = 126,000

    Overall its close enough for me but I should also drop 150 for PMI so even if I'm not saving a huge amount just with the interest getting rid of that 150 will still help out

    1Reply
  • Jimmy LieuBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
    6y
    Originally posted by @Ryan Guffey:

    @Jimmy Lieu Im pretty new with it myself but I believe you can calculate it with

    (interest rate/number of payments) * principal = interest

    So for me I believe I'm at (4.5%/12 payments a year)*120,000 = 427.5 monthly interest repayment

    Then if I do 427.5 * 300 months left = 128,250

    If I refi and do (3.5%/12 payments a year) * 120,000 = 350 monthly interest repayment

    350 * 360 extended back to 30 years = 126,000

    Overall its close enough for me but I should also drop 150 for PMI so even if I'm not saving a huge amount just with the interest getting rid of that 150 will still help out

    Hi Ryan,

    That helped so much. Thank you so much!

    Just making sure I fully understand but after your refi, you will lower your interest payment by around $75 monthly - which will lead to you saving around $2k over life of the mortgage.

    On top of that, you get to drop your PMI which is around $150.

    So you save both 2k from dropping the interest payment AND $150 each month from PMI. Is that correct?

    [email protected]614-300-7535
    Jimmy Lieu, Red 1 Realty4.9120 Reviews
    WebsiteView Page
    0Reply
  • Kim Tucker
    Flipper/Rehabber · Kansas City, MO · Member since 2011 · 2k+ posts · 712 votes
    6y

    So buying subject to - is when the seller is highly motivated, you build a rapport and buy the house and title changes into your name, but the mortgage says in the seller's name.  You make the payments, usually, until it pays off or until you sell the house or it makes sense for you to refinance out of it.

    You just missed our workshop we held on creative financing where we talked a bit about seller financing, where the seller finances your purchases.  The seller acts as the bank as well as Subject To Investing.

    There are a lot of different people who teach the concept, not sure if there are any here on BP - maybe @Coach Chad Carson .

    1Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Jimmy Lieu I believe so, like I said I'm still pretty new at it but thats my understanding of it. My actual numbers are little different but tried to simply it. I should save 250-300 a month short term and a few thousand long term

    0Reply
  • Ryan Guffey
    OP
    Contractor · Kansas City, MO · Member since 2020 · 147 posts · 74 votes
    6y

    @Kim Tucker Oooh that makes more sense, i think have done that to sell a house before I started actually looking into investing but i didn't have a name to put with it

    0Reply
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