Cash-out refinance on owner-occupied two-unit to purchase SFH

[mrteacher]

Hey folks:

My wife and I have owned and lived in a two-unit property for a little under two years. The area in which we purchased has continue to become more popular and prices have continued to rise. In a couple years we want to move into a SFH nearby and, ideally, retain the two-unit and rent out both units.

I am wondering if anyone has experience with a cash-out refinance of an owner-occupied two+ unit with the intention of using the cash as a downpayment on the SFH.

Is this advisable? A great strategy? Prohibitively expense as a result of fees?

***I am also trying to wrap my head around how a cash-out refinance works. I understand that I would be taking out a new loan (restarting the 30-year period) for an amount greater than my original mortgaged amount. For example (fake numbers), if the original mortgage was for $150,000 on a home purchased for $200,000 and there is $125,000 remaining on the loan but the home is worth $225,000 I would still need 20% equity in the house ($45,000) but could have access to around $50,000 in cash ((80% of $225,000) minus $125,000 owed). Is that right? I'd then be starting a new 30-year mortgage on $180,000 but have the ability to throw $50,000 into a SFH purchase.

[waltworks]

If you need to cash-out refi your current place to put down a downpayment on a new one, I'd stop and think hard about whether you're over leveraging yourself. Is there a reason you can't just save the DP up? Needing to pull cash out of the current property is a bit of a bad sign if your intent is to keep it as a rental.

Mechanically, you understand the refi correctly. Remember that you'll pay some closing costs so you won't actually end up with the full $50k in your example (or you'll end up with a bigger loan) by a few thousand bucks, assuming you want a decent rate on the new mortgage. You will also need to qualify for your new loan with the larger loan/payment on the rental.

-W

[clarkfan1979]

Pro: the quickest way for the common man to build wealth

Con: If you do not have enough rental income to cover the expenses, the real estate goes into foreclosure.

Advice: Think about worst case scenario and make sure you have enough cash reserves to handle it.

[mrteacher]

If you need to cash-out refi your current place to put down a downpayment on a new one, I'd stop and think hard about whether you're over leveraging yourself. Is there a reason you can't just save the DP up? Needing to pull cash out of the current property is a bit of a bad sign if your intent is to keep it as a rental.

Mechanically, you understand the refi correctly. Remember that you'll pay some closing costs so you won't actually end up with the full $50k in your example (or you'll end up with a bigger loan) by a few thousand bucks, assuming you want a decent rate on the new mortgage. You will also need to qualify for your new loan with the larger loan/payment on the rental.

-W

I have wondered about over leveraging. I don't think we will need to do a cash out refinance for the SFH down payment, but I was wondering if it is something me might want to do. Would it be advantageous to do that so as to maintain cash reserves and/or not have to take money out of VTSAX to fund the down payment. Ideally, yes, we keep all investments intact, save up for 20% down payment and do not have to entertain the refinance option. I'm just exploring and soliciting opinions to be as well informed as I can be.

[waltworks]

Refinancing carries some meaningful costs (closing costs, time and effort, potentially makes it harder to get your other mortgage, etc) so it's not like it's free money.

If the rental is a solid <1% rule property, you could pull some equity and put it to work this way, sure. If it's a mediocre rental and you're going to be headed into negative cash flow territory, different story. Might be best to post the details on the (future) rental, really.

-W

[mrteacher]

Refinancing carries some meaningful costs (closing costs, time and effort, potentially makes it harder to get your other mortgage, etc) so it's not like it's free money.

If the rental is a solid <1% rule property, you could pull some equity and put it to work this way, sure. If it's a mediocre rental and you're going to be headed into negative cash flow territory, different story. Might be best to post the details on the (future) rental, really.

-W

That makes sense. And, yes, I am aware of the meaningful costs - hence why I am trying to think through this now.

It's hard to predict exactly what the numbers would be down the road, as I do not anticipate us refinancing (if we go that route) for at least 2 years, maybe 3 or 4.

[mrteacher]

Any other ideas?

[waltworks]

Ideas about what? You understand how a refi works now, right?

-W

[mrteacher]

I do.

I suppose I should have said, instead of ideas, perspectives / experiences / words of wisdom / factors to consider

[Kcinegnet]

Syndicate @mrteacher

[August26th]

Looks like this thread got bumped so the info may not even be needed anymore, but...

For a 2-unit cash out refinance using the “traditional” Fannie Mae/Freddie Mac guidelines, you can only cash out up to 75% of the current appraised value. So you won’t get back quite as much as you were thinking.