Cash Out Refinance Advice

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Cash Out Refinance Advice

Matt Medina
Temecula, CA · Member since 2020 · 10 posts · 7 votes

Hello all!

I bought my first property in Southern California this year in March. In my opinion I bought at a great time, interest rates were low (2.6%), and I got the house under asking (in CA, hard to come by). 

My future goal, like many of us, is to own rental properties. The city (Temecula, CA) I bought in is growing, safe and has high potential for rental due to the job opportunities and military base near the area. I put down 5% ( conventional loan ) with the goal to save as much capital as possible. The house was move in ready, so I haven't forced much appreciation into the home other than Vinyl fencing and small upgrades to the landscaping. However, looking at the comps in my area, 2 homes in the the same neighborhood sold for 100k more within the last month. These homes appeared to have no major upgrades over my home, which makes me believe my home may appraise for a value close to what these comps sold for. Knowing that the value will eventually go down when the market settles down, I want to take advantage of the equity while I have it! The goal with this equity would be to invest into my next property. 

My current mortgage is just under $2500. According to Zillow, they estimate I could rent my home for $2800 per month. But looking at other rentals, I would lean on the conservative side and say I could get $2400-$2600 a month for the property. Yes, this property is on the cusp of being able to cash flow, but with prices in CA, I thought I did pretty good for my first property.

So my dilemma ( or lack of knowledge ). To my understanding, if I cash-out refinance my monthly mortgage will increase due to 3 factors. The value will go up, the interest rate will increase from my current 2.6%, and my PMI will go up ( currently $80 ). Pulling out the equity would increase my current mortgage and possibly make it a negative cash flow property.

My questions are, 

1. Any suggestions on how to calculate what my new mortgage would be if I were to Cash out refinance?

2. Would the negative cash flow be worth having the equity in hand to purchase a new property?

3. Would the better option be to keep the equity in the home and buy a new property with saving money the old fashion way.

Thank you everyone who takes the time to help! 

Have a great day!

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Doug Spence
Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
4y

@Matt Medina Congrats on your first property! Make sure you're doing a thorough rental analysis of the property both with your current mortgage and after you refi. If your mortgage is $2500 and you rent it for $2400-$2600, you are probably going to be in the negative every month after you account for vacancy, expenses, capex, property management, etc. This is not necessarily a BAD thing, as you're really just treading water month to month while the property appreciates over the years. But if your goal is to generate cash flow every month with this property, then its probably not going to hit your goals for the first couple of year until rents go up more.

Just want to make sure you're going into it eyes wide open. 

1. I would reach out to a local mortgage lender so they can give you cold, hard data on your refi. This info may make it an overwhelming "no" for you. I can recommend a local lender to you if you want.

2. The answer depends on your long term goals. Would this second property also be in Temecula? Or would you be using the capital to buy in a different market? (more affordable, higher cash flow market like the midwest/southeast)

3. It depends on your goals! What would you do with the money? What return would you expect to get? Would that return offset the negative cash flow of your Temecula house?

Best of luck and keep us updated!

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  • Jeff Shumway
    Lender · Tampa, FL · Member since 2020 · 182 posts · 90 votes
    4y

    Hi Matt, congrats on getting a great property at a good time in the market. There's a couple items to consider with the cash out refinance. The maximum loan amount will be 80% of the value of the home so you will need to have significantly more than 20% equity to make the refinance meaningful. How much do you owe and how much is the home worth? For example if the home is worth 100K and you wish to do a cash out refinance, the maximum loan amount will be 80K. If you owe i.e. 90K on the home, the refinance would not work because refinancing is just replacing the old loan with a new one. 

    That being said, at 80% loan to value, you would no longer have PMI so that payment would not increase. The interest rates likely would increase slightly but you could probably do an interest rate buydown to keep it around your current rate. This will depend on a whole host of factors (credit score, debt to income ratio, LTV etc.)

    The new mortgage payment will depend on the loan amount and the interest rate. I would recommend doing it over a 30 year amortization. There are a million mortgage calculators online that will give you a ballpark estimate. Remember your taxes and insurance will remain the exact same. 

    I'm always a fan of cash out refinancing to acquire a new property, so long as the new property makes enough money to cover the increased payment from the first property. Cash out refinancing will almost always be 1000000x quicker to get the funds than saving money the good old fashioned way. If you are in no rush, then by all means save the money but if you're looking to grow then I would suggest refinancing.

    2Reply
  • Doug Spence
    Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
    4y

    @Matt Medina Congrats on your first property! Make sure you're doing a thorough rental analysis of the property both with your current mortgage and after you refi. If your mortgage is $2500 and you rent it for $2400-$2600, you are probably going to be in the negative every month after you account for vacancy, expenses, capex, property management, etc. This is not necessarily a BAD thing, as you're really just treading water month to month while the property appreciates over the years. But if your goal is to generate cash flow every month with this property, then its probably not going to hit your goals for the first couple of year until rents go up more.

    Just want to make sure you're going into it eyes wide open. 

    1. I would reach out to a local mortgage lender so they can give you cold, hard data on your refi. This info may make it an overwhelming "no" for you. I can recommend a local lender to you if you want.

    2. The answer depends on your long term goals. Would this second property also be in Temecula? Or would you be using the capital to buy in a different market? (more affordable, higher cash flow market like the midwest/southeast)

    3. It depends on your goals! What would you do with the money? What return would you expect to get? Would that return offset the negative cash flow of your Temecula house?

    Best of luck and keep us updated!

    3Reply
  • Brad Sneckner
    Lender · Riverside, CA · Member since 2014 · 75 posts · 60 votes
    4y

    Hey @Matt Medina Nice work on such a great purchase! And I would agree, you locked in a great property in a great area with a great mortgage. Win win win! 

    The info provided by @Jeff Shumway and @Doug Spence is spot on, and really helpful ways to assess your scenario. I would concur with Jeff as well that doing a cash out refi would be a fantastic way to look at securing another property, but as he said it really depends on the value and loan balance on your current mortgage. It would be hard to pull out any substantial amount of money I'm guessing, and the cost to buy the rate down to your current rate would be a big deciding factor. You don't want to increase the rate on $500k worth of loan in order to pull an extra $10-20k for example. If there is enough equity to pull, and the cost of getting your same rate is prohibitive, a HELOC could be a decent option as well. It is less likely to cashflow with an additional payment, but at least in that scenario you will be paying down far more principle each month by keeping your lower rate.

    All in all, you're in a great spot and have some interesting options available to you. I would also recommend talking with a local lender to assess your specific scenario and see what we can do. I'm just up the road in Riverside so feel free to reach out if you have any questions!

    Good luck either way!

    1Reply
  • Jessica Tsao
    Lender · CA · Member since 2019 · 82 posts · 46 votes
    4y

    @Matt Medina

    80% is max you can get on a cash out refi. Have you thought about refi to remove your PMI? There are options where the lender pays most of your fees and that would lower your monthly payments and you can cash flow better to save more money to invest as well. If you know this will be a rental property, then it's something to think about. Good luck.

    0Reply
  • Matt Medina
    OP
    Temecula, CA · Member since 2020 · 10 posts · 7 votes
    4y

    Thank you everyone for the responses!

    I currently owe $440,000 of a $446,500 loan. The house is estimated to be worth approx $550,000.

    So like @Jeff Shumway @Brad Snecknerwas pointing out, with a cash out refinance with my specific scenario I will only end up with 20% of the new value. ( in this case $550,000 ) I owe $440,000 on my old loan and the new loan I will still own $440,000. So, a cash out refinance will not work, correct?

    Like @Jessica Tsao and @Jeff Shumway both mentioned use the 20% to get rid of my $80 PMI, however, this would only make sense if the new interest rate doe not increase my monthly payment more than $80. Or is there an option to get rid of PMI by only proving you have 20% equity? such as a new appraisal?

    Thanks again for all your time!

    0Reply
  • Brad Sneckner
    Lender · Riverside, CA · Member since 2014 · 75 posts · 60 votes
    4y

    @Matt Medina Typically, unless you've done extensive structural improvements to the property, you're not going to be able to remove the Mortgage Insurance without a refinance within the first two years. After two years, you can usually just do an appraisal to prove the equity, and keep your loan and rate.

    You would just want to weigh the cost/benefit with the rate change to decide if it's worth doing.

    0Reply
  • Jessica Tsao
    Lender · CA · Member since 2019 · 82 posts · 46 votes
    4y

    @Matt Medina, If you are @ at fixed rate of 2.60% and your PMI @ $80 with a 440K balance. I don't see a benefit in refi right now. You got a great rate and the current rates are not low enough to make it to save $80 PMI. The math isn't there. At least not in your current situation. In some cases it is. Hope that helps.

    0Reply
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