Cash out Refinance time to pursue?

Question

I’m refinancing some properties. My thought is to do a cash-out refinance at these low rates for additional investments. Pros/Cons?

Ken Sellers · Answer

I have a similar decision on my hands. I have a ballpark of 200-250k equity in my house and want to use it for a down payment on my first investment property. I am in the middle of a REFI right now and am unsure if i should switch it to a cash out refi (interest rate will rise from 2.6 to 3.25), or do a HELOC after the REFI.

Andrew Postell · Answer

@Joseph Mallon this is a very broad question to answer. We can probably spend about 3 pages on this subject but the main item to consider - can you take cash out? Meaning, if you get a loan, what is the LTV of the loan you would receive? And if you do take the cash - what will you do with it? Meaning, if you can cash out for $5,000....well, there's not really a lot to do there. $50,000 might be good....but depending on your current value, loan amount and loan type, can that be possible?Maybe provide 1 of your properties as an example? Meaning, can you give us an idea of the value and your loan amount? Oh, and if it's a single family or a 2-4 unit? That will help us provide a little more specifics. Thanks!

Account Closed · Answer

Craig has better experience about this types of deals

Andrew Postell · Answer

@Ken Sellers maybe I misunderstood what you were saying but you only listed negatives with a HELOC and only positives with the "cash out loan" option. There are certainly pros and cons to both scenarios but it sounds like you are more concerned with the HELOC and more at ease with the traditional loan. I'm 100% ok with that logic. Neither one of these is a "NO, DON'T DO IT" scenario. Either is fine and both have positives and negative. I cannot predict what will happen. But if you feel that certain things will happen...and that it makes you feel better about a fixed rate loan....then do that. Do whatever you feel is best for you. I hope that makes sense.

Ken Sellers · Answer

To clarify, your saying the cash out REFI is the better option as it pertains to my situation? The other con of a HELOC that just crossed my mind is that it would technically be a second mortgage on my house (please correct me if this is not the case). So when it came time to apply for additional mortgages on properties, they would be in 3rd or 4th place (if i want to buy multiple). This, combined with the potential for stricter lending practices in a down economy, could make it very difficult for me to obtain financing. I am very new to this, so please let me know if these things make sense.

Andrew Postell · Answer

@Ken Sellers your thought sounds ok with me. I would say to go for it.

Ken Sellers · Answer

Thanks for the reply Andrew. The specifics on my situation are that my house principle is 245k. It will appraise for at least 450k, with potential for +500k. My lender said 80% LTV, so i should be able to access somewhere in the neighborhood of 120k-150k. I am in the process of a REFI right now, going down from a 4.625 to a 2.625. If i opt for a cash-out REFI, that 2.625 will increase to 3.25. The main thing that worries me is lets say hypothetically i open my HELOC in the near term with the intention of waiting 6-9 months for the market to come down. There is a recession, and home values do come down quite a bit...and lending becomes tighter. I go to make my move and purchase properties, and the lender closes/freezes my HELOC due to the economic conditions. Is this a realistic scenario? On the flip side, if i do a cash out REFI right now....i get my hands on capital and lock it up now to ensure i have it. I also get a long term fixed rate on the money. But i will pay the 3.25 interest on the $$ until i use it (though i would park it into a ~1.5% interest savings account to mitigate this cost), and my mortgage will rise significantly, without being able to take advantage of interest only payments that HELOC's provide. Right now the general consensus is that there will 100% be a dip in the market in the coming months/year. And depending on what kind of dip that is, having liquid cash to capitalize will be crucial. So im just trying to decide if i should make that my number one priority right now, even if it means slightly worse terms.

Jasmine H. · Answer

@Joseph Mallon totally, we're taking about $200k not only to reduce our rate but to invest.Good luck!

Joseph Mallon · Answer

@Andrew Postell The cons I could see are if the housing market doesn’t dip much after the COVID-19 pandemic. In addition, I suspect it’s going to be harder to get financing going forward with so much uncertainty in the economy. I will have debt to equity ratio for a lender, however, I’ll also have more cash for a down payment for an investment property. Thus, perhaps this is more of a positive than a negative.I see this as an opportunity to get access to capital because I suspect the housing market will be more favorable from a buyers perspective in 6 months or so. Hence, my reasoning for accessing my equity.

Josie W. · Answer

I am in the same situation...I have been looking into my second SFH. Thinking about getting a home equity loan vs a HELOC on my primary residence. I bought my fist SFH last march, rate of 3.25% at 15 years.I see a lot of positives for HELOCS in this thread, but I wonder, if helocs' interest rates are not fixed, given the uncertainty of the real estate market, wouldn't if be better to opt for home equity loans with a fixed rate. Also, if the purpose of the loan is to buy a property, would the loan make more sense assuming you would need to use all the money invested to purchase 1 or 2 properties.I am new in this real estate investing and that is my train of thought,I may be wrong and I would like to hear other investors opinions to learn more about this topicThank you for your feedback!