Refi or Hard Money Then Refi??

Question

I purchased my primary residence in September 2015 in San Diego, CA. We got a great deal on the property and have already gained a good amount of equity. We purchased at $400,000 and currently it is valued at approx $485,000. I want to do some upgrades to the home that should cost around 25-30k. Once the renovation is done my guess is the house will be valued between $530,000-$550,000. My question for the forum is, given these numbers are correct, should I refinance, get rid of my pmi and take out a HELOC for ~25k which would only increase my mortgage payment $40 or $50 a month, or try to get a hard money loan for 30k, complete my renovations then refinance and pay back the lender? Also, do I even have a chance of getting a hard money loan for only 30k? What kind of terms should I expect if I go the hard money route? What other options do you see in this situation?

David West · Answer

Thanks Account Closed. It definitely sucks to pay pmi every month. I appreciate the feedback.

Account Closed · Answer

HELOC all the way! Get rid of the PMI as fast as possible. If your able that would be the best option.

Dan H. · Answer

Maybe you can call your credit card company and get the limit raised.  It seems possible with your good credit.  I do not believe that would hurt your credit but verify this.

There is no easier money than pulling the plastic out of your wallet.  Of course it comes at a cost so make sure you can pay it off in a timely manner (ditto hard money loan).

Good luck

David West · Answer

@Dan Heuschele that's another point of concern that I didn't even bring up. I'm worried about a conservative appraisal since the LTV is going to be so high. @Justin R. My lender says there are programs that I can go up to 90% with a 720 credit score, so hopefully that will work, but I will check out the Lending clubs too. Sites like Redfin have my value at just over $520,000 but I called my realtor to have him check the comps and give me a conservative estimate. He came back at $485k and my lender thinks it's around $500k. I do have good credit but I only have 1 credit card and the limit isn't anywhere close to what I need to accomplish my renovations. If I apply for more credit cards that will negatively affect my credit, and not allow me to borrow at the LTV that I need...Catch 22! That's kind of what I love about real estate though, there are complex problems, but there is always a way to make it happen. It comes down to creativity, knowledge, and the ability to solve the puzzle.

Dan H. · Answer

I find HELOC and refinance appraisals seem to be more conservative than new property purchase appraisals.  So if your place is really worth $485K I think it is unlikely that it will appraise at $485K for a HELOC.  I was involved in a recent refinance that I know the property is worth real close to $500K (in this market I claim to be more of an expert than the appraisers) but the appraisal came in at $465K.  His comps were not good.  I had seem most of them and the appraiser had not.  I am confidant that if I was purchasing the property at $499K the appraisal would have come in at $499K.

It seems not proper but many people share my belief and I do a fair amount of refinancing.

So if your place is worth $485K and appraises at $465K (which I claim is likely) and you put 10% down that would provide you $12K if you could get a HELOC at LTV 80/20.  So I agree with @Justin R. that you are unlikely to get the money you desire via a HELOC.

If your term is short enough and you have the proper credit you may be willing to use your credit cards for this type of money.  It is how I would do it but it relies on you having or getting credit card limits that allow it.  I suspect credit cards will be cheaper than hard money loan.  Credit cards would definitely be easier.  Another advantage of the credit card route is the interest starts accruing when the money is actually spent.  Hard money loan likely would provide you the capital all at one time and interest would start immediately.  The expense of the points of the hard money loan could not be saved by accelerating the project which could occur if credit cards were use (i.e. no points).

A year ago I did 2 rehabs virtually concurrently and placed the entire expense (over $60K) on credit cards.  The interest for a couple of months would have been high (I did not pay any interest) but the duration is so short that the cost of the money is reasonable.

This option relies on you being able to get limits on your credit cards that would make it an option.  It also relies on you being able to refinance quickly and your refinance permitting the credit cards to be paid off but this is also the case for a hard money loan.

Good luck

Justin R. · Answer

@David West My guess is you won't be able to / it will be difficult to get a HELOC with that amount of equity - assuming you bought with 10% down, your loan is $360k, which means you're just barely 25% equity.  More power to you if you can find someone to do it!

You may also look at the Prospers and Lending Clubs of the world to see how much they'd loan you.

I live here locally too, and I'd also suggest being *very* careful with any assumptions about value and whether there will be a market to support it in that price range.  No doomsday prediction here, but the numbers say to me there's weak fundamentals in that price range in most areas of the city.