Idea for a new mortgage type....would this even work?

[Lesley Resnick]

My BP friends I hope you can help me with this idea.  I have not seen any lenders doing this and I am wondering why?

I would like a loan that adjust the principal every month and loaned me the difference between my current equity and the loan principal in excess of the 80% LTV.

You can do this on HELOC loans. They allow you to pay down the loan and draw money out in the same month. I could pay my P&I, then draw my excess Principle from the loan. Second loans are common with owner occupied SFH. Investment property seconds can be more challenging to find. They are typically a smaller dollar than the first loan. This idea works better on larger loans.

The main reasons to do this is for the tax advantage and to gain access to the equity every month.  The interest on the loan is tax deductible, the principal is not.  Technically deprecation reduces taxable principal as a function of obsolescence.  Now the cool part, loan proceeds are not taxable. Therefore if you received a check every month as a loan, it would not be income in the short term, since it is a loan.  Upon sale of the house you would only have to pay taxes on the appreciation and depreciation recapture.  In the other scenario, if you had equity in the house, the profit from the sale (basis - sale proceeds) would create a larger taxable event.

As I see it equity is money that is not working for me, it is just sitting.  Some people like equity, but I am all about the cash flow.  If I were retiring, I would take a more conservative approach.  I am in rapid growth mode and want every dollar of leverage I can get. 

Example:

I have used round numbers to keep it simple.  There are no extra fees like property tax, insurance, maintenance, etc. 

120k house / 100k loan   80% ltv

$500 a month @ 4.4% makes an even number

30 year Am

Principal    $134

Interest      $366

I send the bank P&I of $500 a month.  $336 is for interest, the lender keeps.

the other $134 is credited to my account and is considered equity

I would then like the lender to reevaluate my loan and determine that I can borrow and additional $134 this month and still be at my 80% LTV. They would issue me a check for the $134.

It looks similar to an interest only loan, but the $134.00 a month is not taxable now or upon sale of the property.

I have made a number of assumptions for my second example:

Rent multiplier of 1x the property would bring $1,000 a month

costs P&I 500 a month

Tax and Ins 200 a month

700 a month costs = 300 a month cash flow - not a bad scenario

Tax liability 300 a month - tax on principal increase upon sale

My mortgage

Rent multiplier of 1x the property would bring $1,000 a month

costs P&I 500 a month

Bank loans you an additoanal  $134 per month

Tax and Ins 200 a month

700 a month costs = 300 + 134 = 434 cash flow 

Tax liability 300 a month and no tax liability for principal increase. 

So, am I on to something or is my logic flawed?