Author Topic: Would you do a cash out refi in my situation?  (Read 1462 times)

Lmoot

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Would you do a cash out refi in my situation?
« on: March 04, 2018, 11:20:56 AM »
The goal: I want to buy a house by Oct 2019 (though aiming for May 2019)

The obstacle: I owe around $35k in credit card debt (all 0% interest...due mostly to work done on my one rental property)

The mortgage on the rental ($40k balance) and the credit card balances are the only debt I have. It will take me most of a year to finish paying off the credit cards, and I donít want to wait yet another 1 1/2 years after that to save for a down payment on a house of my own to live in.

I have about 75% equity in my rental property (my former primary residence...I currently live with my grandmother in what was meant to be a temporary situation while she recovered from surgery). I have never done a refi, much less a cash-out, and for the sake of not wasting any more time than I already have, the second I pay off the credit cards, I am considering taking the 20% down payment funds ($30k max) from a cashout refi.
« Last Edit: March 04, 2018, 02:12:57 PM by Lmoot »

Lmoot

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Re: Would you do a cash out refi in my situation?
« Reply #1 on: March 05, 2018, 05:26:30 AM »
I also wanted to add that when I used a refi calculator to see what my new payment would be if I cashed out $30k, it comes to around the same, or even less than my current monthly payment (depending on the rate I plug in), for 3 possible reasons:

- current interest rate is 5.375% (not great, but I was in my 20's and never had any loans, so my score wasn't high; I'd expect at least 1/2 - 1 % lower rate today)
- I would refi for another 30 years
- The amount I want to take out is relatively low, so that it puts the new loan within $10k of my original loan amount, hence just a minor change in the PI payment, even calculating the same interest rate

Since the numbers look better than I thought, I might even consider getting extra out to pay off a bulk of the credit cards. This is not a "slippery slope" thing for me. I am and always have been about the numbers. I have always used debt as a strategy, not a crutch. I am just trying to be efficient time-wise.

civil4life

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Re: Would you do a cash out refi in my situation?
« Reply #2 on: March 05, 2018, 09:53:21 AM »
Hello,

You might get some more help with some more details.


How long are the 0% financing?
What are the rates after?
How much do you anticipate paying off prior to losing 0% financing?
Paying the min. balance for all cards and other life expenses, how much are you able to save towards the 20% for future house?
What is driving the May/Oct. 2019 deadline?
What is the rental making you?
Would it be better to make it your primary residence for a few more years prior to buying another home?

The Real Estate and Landlording group probably can give you some direction on whether your current rental is really worth it.

If it is not worth it that opens a whole plethora of other options.

Lmoot

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Re: Would you do a cash out refi in my situation?
« Reply #3 on: March 05, 2018, 12:35:28 PM »
^Thanks so much for the feedback, and suggestion to ask on the real estate board. I might do just that.

How long are the 0% financing?.....ranges through Aug 2019

What are the rates after?.....Not sure but definitely higher than a mortgage; but I wouldnít pay them anyway as I intend to pay them off before the expiration, one way or another

How much do you anticipate paying off prior to losing 0% financing?....I would Ďt want to pay off more than $10k through the refi; I already hate the idea of paying even 4-5% on any of it, but right now time is more important than money.

Paying the min. balance for all cards and other life expenses, how much are you able to save towards the 20% for future house?.....Unfortunately Itís not as easy as just paying the minimums. I am also putting cash aside each month to grow in a high-yield savings, so that I will be able to pay off the cards by their due date. I didnít plan on saving for a DP until I am certain the debt will be taken care of before it begins accruing interest. I try to save at least $1500, aiming for $2000 each month (about 50% of my take home... it right now that all is pinned for the debt payoffs.

What is driving the May/Oct. 2019 deadline?....By my bday or within 6 months.

What is the rental making you?....After PITI only about $250. But itís not the best case scenario for a typical rental. I didnít purchase it to be a rental. Iíve been renting it to friends and coworkers over the years below market rate. The tenants act as the property managers taking care of any minor issues that come up, often times out of their own pocket. My family and I also maintain partial use of the property (recreational), since there is a second building and separate yard space. As part of the agreement,  the tenants pay the utilities, including any I use. So itís a good deal for all involved. I raise the rent each time new tenants move in.

Would it be better to make it your primary residence for a few more years prior to buying another home?.....unfortunately itís 30 min away in a different city, and Iíd prefer something closer to my grandmother since I intend to continue working from her house so sheíll have someone there during the day. Sheís 88 and still can drive and gets around well, but there are little things throughout the day that she is used to having help with.

« Last Edit: March 06, 2018, 01:57:49 AM by Lmoot »

chasesfish

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Re: Would you do a cash out refi in my situation?
« Reply #4 on: March 05, 2018, 07:08:44 PM »
Cash out refis on rentals are a total pain in the ass to get.  They were one of the highest categories of mortgage defaults in the Great Recession, so the rules have been locked down hard.  There's even a cottage industry now of investors buying/renovating homes then selling them as "turn-key" rentals to the wealthier lower risk/lower return investors then doing it over and over.

If this was your primary residence for two of the last five years, why not sell it, take the gains tax-free, then buy/renovate another property?

Saving in Austin

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Re: Would you do a cash out refi in my situation?
« Reply #5 on: March 05, 2018, 09:42:19 PM »
Credit card debt is unsecured debt.

If you can't pay, the only thing affected is your credit report.

Mortgage debt is secured.

If you can't pay, they take your property.

I wouldn't do it.

Lmoot

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Re: Would you do a cash out refi in my situation?
« Reply #6 on: March 06, 2018, 02:19:54 AM »
chasesfish That is something I didn't consider. And I am sure refinancing it as a rental property would make the rate higher; something to think of in my calculations on deciding whether or not to go this route. I am hoping a relatively small cash-out compared to high amount of equity will bolster my chances.

Selling isn't a personal option for me. I am pursuing the buy and hold strategy, and the stars aligned for me to acquire this property in such a way that it would be difficult to replicate (bought at bottom of recession, got $8k tax credit which I applied towards renovation, it's in a prime area and has a large lot rare for the city...mortgage is only $354). Plus the area is shooting up in value and is already becoming unaffordable to me. I still get use out of the property and plan on living there one day again as it's less than a 5 min walk from my current part time employer who I eventually hope to work full time with. And I would be lying if I said I didn't have a sentimental attachment to it. I've had the same neighbors for almost a decade, it's my first house, and my entire family all the way to my grandmother and best friend, has had a hand in fixing it up with me. I consider it my home base and no matter where I go or live in the world, I will always have a place in/near my home town. Plus it's in a vacation spot so I would definitely use it as a second home in the future, if anything.

Saving in Austin That is definitely something to think about (which I didn't). Nobody plans to fail, but it's always good to know the risks before hand, so thank you for bringing that up. Having a mortgage on 2 houses is scary....but living at home when I turn 35 is equally scary!

So much to think about and you all are bringing up great points. I've never considered a refinance before and want to get as many of the dirty details as possible before I decide to proceed. Whether I refi or not, I don't want to have a mortgage(s) that equals more than $170k, but aiming for closer to $150k.


FatFI2025

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Re: Would you do a cash out refi in my situation?
« Reply #7 on: March 06, 2018, 08:00:13 AM »
If your credit is improved significantly, I would cash out refi with an owner occupied loan. This seems feasible since you are able to occupy part of the property while still having renters -- that rental income will help you qualify. Since you're still using part of the property for yourself, you're still an owner occupant (even though you spend a lot of time supporting your grandmother), and owner-occ loans come with way more favorable terms. You can cash out refi up  to 10% LTV without PMI.

Your big challenge will be refi'ing with that large CC debt. After you refi, you will need to wait a year after refi'ing before buying another owner-occ property, although some people skirt this rule since banks don't generally track it. A year isn't a long time, so if it doesn't line up with your birthday goal, I would adjust the goal to get the best numbers possible.

I'm not shy of taking on lots of leverage, but would advise against taking on any additional mortgages while you have any CC debt, regardless of the interest rate. The fact that you used a CC means that you're not well capitalized, so you're one car accident away from 25% interest. Plus you probably won't get prime rates carrying it.

Lmoot

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Re: Would you do a cash out refi in my situation?
« Reply #8 on: March 06, 2018, 12:55:40 PM »
^ Thank you RyaninLA. I too considered refinancing as owner-occupied. On paper I claim it as my primary residence. All of my mail is delivered there, my homestead exemption is claimed, my driver's license address...etc etc. And you are right about the CC debt. There is just no way around it. No amount of creative financing is going to change that. It would just be like filling a hole with dirt, and creating another another hole in the process of digging.
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But staying another year is absolutely not an option for my sanity therefore....

I've reached a decision with all of the honest and thoughtful advice I received in this thread (thank you all so much!). This summer I'm going to look for a room to rent in a house. It means I have to get over my [unfounded] prejudice against renting. I can find decent rooms for $500 in the area close to family. I started a practice search on Craigslist (BIG MISTAKE) and I cannot unsee the roommate request descriptions, many of which were a thinly veiled request for a live-in sex slave. Yeah-no.
But I came across roommates.com, where the wholesome people live, and felt a lot better. Several young professional couples renting rooms out of their house, or roommates looking for a 3rd roommate to share a house, so my heart is lightened.

Yeah, it will be a little monthly kick against my savings, but sometimes saving costs more than it's worth, and this is one of those times. I'll still be able to put a good bit away ($500 is about one week's of saving) and I can take my time thinking through my next step, while getting a change of scenery and lifestyle I so desperately need.
« Last Edit: March 06, 2018, 12:58:36 PM by Lmoot »