Have duplex and live in one unit-Cash out or Heloc, refinance ?

Question

Hello,

We bought a duplex 7months ago and living in one unit and renting other unit. Now, we would like to buy a house with a good school ratings and rent our side too. Market is hot now and I was thinking to cash out/HELOC refinancing the duplex, but my lender is saying “you can’t because you didn’t pay 20% of the mortgage yet”.

FHA loan 10% down payment and loan amount $411K

Is it true or too soon to HELOC or Cash Out Refinance?

Jody Sperling · Answer

If you are able to, build up some more equity in the loan by making extra payments. Then finance directly into a first-position HELOC so you can recapture the trapped equity. Don't just refi into another loan product and reset your repayment calendar and interest payments.

I've really benefited from teachers like the Kwak Brothers and Denzel Rodriguez learning about HELOCs and what they can achieve. Finding a bank that will sell the product you need can be work, but if you find it, you can ditch PMI, have a revolving line of credit, and pay the debt at a much accelerated rate. Best of luck!

Justin Phillips · Answer

@Nazgul Tataeva Along with @Jody Sperling I'm a huge fan of specialized 1st position Helocs that are tied to Zero Balance sweep checking accounts. The line of credit can be set to up to 90% of current value, so you have access to that equity any time, but you don't have to pay for it until you use it. At your current LTV, there won't be much equity available to start, but every dollar you deposit will lower your balance and increase your available line to pull from. Positive cashflow creates a large snowball effect, as both your remaining balance and interest cost are dropping rapidly. My wife and I have one on our property, and it's been great! We got the line set based off these inflated prices, and we're putting idle funds to work until the market turns, at which point we'll write a check out of our line to finance the next property.

Joe Splitrock · Answer

Think about it logically, you can't take cash out if there is no cash to take out. Both a HELOC and Cash Out Refinance require equity to secure the cash out. Equity comes three ways:

1. Loan pay down

2. Time / market appreciations

3. Forced appreciation (rehab or other improvements to the property)

After only 7 months, you have owned it long enough to get much in the way of loan pay down or market appreciation. If you didn't make significant improvements to the property, there is likely no forced appreciation either.

As others mentioned, there is also a one year occupancy requirement on FHA.

Torrell Palmason · Answer

You Absolutely need to live there a year as was stated. Most HELOCs will go up to 90% LTV so you should be able to get one. This will then bring how to proceed from there, personally I think a good option would be to look at Freddie Mac Home Possible as you are only allowed ownership interest in two financed properties including the Home Possible loan. From what you have said this should fit your scenario.

Home possible down payment can be as low as 5% on 2-4 unit provided your Credit score is acceptable. There is also a 80% area median income limit to qualify.  Unlike the FHA loan which has Mortgage insurance for the life of the loan the Home possible follows conventional guidelines so mortgage insurance can be cancelled at 80%LTV. This loan like FHA is a owner-occupied loan and will require a minimum of 1 year residency. Best of Luck!

Nazgul Tataeva · Answer

@Jody Sperling thank you for explaining.

I will look for charter or magnet schools to apply near us.

One more question: Should  I wait and just refinance it down the road? I would like to get rid of the PMI.

Thank you so much again

Jody Sperling · Answer

The lender is correct. An FHA loan requires you to live in your property for at least one year.

In most, but not all cases, banks won't offer terms for a HELOC if the homeowner has less than 25% equity on the property, but if you search, you may find a lender who would give you a small HELOC. It's doubtful you could get enough for another home purchase.

If being in a good school district is your short-term goal, you should have until August, but that would still put you at 10 months, not long enough to sell, so you might consider seeing if a target school district has an open enrollment or lottery system for students outside the district.

My wife and I looked into a similar system for District 66 here in Omaha a year ago when we were moving and converting our former primary into a rental. We would have been able to keep our kids at the better school through an application process, but it ended up moot, as we bought a new primary six blocks from the former primary.

Best of luck to you. I understand your drive, and it can be hard to feel that things are moving too slowly, but stay the course!

Have duplex and live in one unit-Cash out or Heloc, refinance ?

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