Increase interest rate for a cash out refi, or just keep saving?

Question

I bought a 3/2 SFH as a primary in 2015 for 136,000, the interest rate is 3.375% and it is on a 7/1ARM that is up for adjustment in May 2022. The value has grown to $200,000 so I have about 93K in equity right now.

I want to use some of the equity towards a down payment for a second rental in the same area. I got some quotes yesterday and to do a cash out refinance as an investment property the rate is between 4.6-5%. I want to pull 30k out to put towards the down payment.

Alternatively I could just keep saving or I could take a loan against my retirement savings to get started.

Is it worth it to do the cash out refinance when the interest rate will go up by 1.3-1.7% ? Or should I just leave it until May when I find out what the new interest rate will be (it could go down), keep saving or look into a different strategy?

Thanks!

Heidi Kenefick · Answer

@Jaron Walling

Oh- and it was a primary when I bought it but I moved away so it’s a rental now. Rentals just get worse rates than primary homes which is why I mentioned that.

Heidi Kenefick · Answer

@Jaron Walling

My thoughts exactly on the 401k loan, plus then I miss out on the gains in the market and that isn’t something I want to miss!

I called a few lenders and I can buy down the rate to make it make sense, which the lender I spoke to yesterday didn’t mention as an option. He actually told me I would be better off using a local bank than them. Haha.

With the buy down I can beat the current rate and the break even point is about 6 years. Since someone else is paying it down, my cash flow stays the same, and I get cash out to put to work elsewhere this seems like the best option.

Michael Reiserer · Answer

@Jaron Walling you can take a loan of up to 50k against your 401k and you have to pay it back within 5 years at 1-2 points above prime lending rate. The advantage is that you can pay it back whenever you want within the 5 years and the interest goes back to your own retirement not some 3rd party lender. If there is a need for a loan I consider that less risk then owing a 3rd party lender

Jaron Walling · Answer

@Heidi Kenefick "or I could take a loan against my retirement savings to get started." - Pulling money from retirement to fund real estate purchases is risky unless you have experience and a plan to pay it back. Uncle Sam can tax the life out of you if you get it wrong.

Why is it an investment loan? i thought you said it's a primary residence? I haven't refinanced in a while but I thought rates were still low. Pulling $30k and using that for another property is fine provided you're running the numbers and the deal makes sense.