Author Topic: Cash out Home Equity or Keep Paying down the loan?  (Read 478 times)

NOVAMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Cash out Home Equity or Keep Paying down the loan?
« on: February 05, 2021, 07:48:54 AM »
Good afternoon fellow Mustachians,

Looking for a little guidance and recommendations on my current scenario. I currently House Hack my home and at minimum I am thinking of refinancing my current 3.375% 30 Year Fixed Loan with a maturity date of 02/01/2050.

Here are some numbers:

Unpaid Principal on my loan: $238,688.65

Zillow value of the home: $426,183

EST Equity (dif of the above two): 187,495

Monthly Rental Income: $2,150

Monthly Expenses: $2,320

Net $-170 monthly

So in sum, roughly paying $170 a month in a particularly expensive rent location. My question is what would some of you do in terms of the refinance, and would you pull out the equity, and if so what would you do with the equity?

Really appreciate everyone's thoughts, advice, and good vibes!

Sending awesome Karma your way!

NonprofitER

  • Stubble
  • **
  • Posts: 220
  • Location: Texas
  • Reaching FIRE w/ High Purpose (Low Pay) Nonprofit
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #1 on: February 05, 2021, 08:05:50 AM »
From the initial numbers, sounds like you're doing great in terms of low-cost living in a HCOL area!

Re your question: can you give us more information?
What is your house-hacking arrangement? IE, renting out rooms in your house, a duplex, etc.
What is your long-term plan for the house? (keeping the house as a primary, eventually moving in 5 years, converting it to a rental, etc.)
Are there any upcoming life circumstances that may effect your plans? (serious partner that your planning to marry next year, potential job transfer, etc)
What would you do with the cash out funds? (invest them in more real estate vs invest in index funds)

I think understanding the context and your long term goals would help determine whether to cash out, or just refi to a lower rate.

NOVAMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #2 on: February 05, 2021, 08:15:00 AM »
From the initial numbers, sounds like you're doing great in terms of low-cost living in a HCOL area!

Re your question: can you give us more information?
What is your house-hacking arrangement? IE, renting out rooms in your house, a duplex, etc.
What is your long-term plan for the house? (keeping the house as a primary, eventually moving in 5 years, converting it to a rental, etc.)
Are there any upcoming life circumstances that may effect your plans? (serious partner that your planning to marry next year, potential job transfer, etc)
What would you do with the cash out funds? (invest them in more real estate vs invest in index funds)

I think understanding the context and your long term goals would help determine whether to cash out, or just refi to a lower rate.

Really appreciate your response NonprofitER

Yeah I am in the greater DC area living pretty dang close to free.

What is your house-hacking arrangement? IE, renting out rooms in your house, a duplex, etc.

** Renting out 3 rooms in a townhouse, I have the bottom floor of three floors ** I could also rent out this portion of the house and net an additional $750 a month...

What is your long-term plan for the house? (keeping the house as a primary, eventually moving in 5 years, converting it to a rental, etc.)

**My general plan is to keep the house so long as I am also in the DC area. I imagine I will sell it in less than 10 years?**

Are there any upcoming life circumstances that may effect your plans? (serious partner that your planning to marry next year, potential job transfer, etc)

**There is a possibility I move into a partners condo**

What would you do with the cash out funds? (invest them in more real estate vs invest in index funds)

** I have a second BNB property in another city. Open to investing in another property but also index funds sound kinda nice, or something that is less of a lift.

!!Again really appreciate your thoughts and advice, just trying to get some other eyes and thoughts on the best strategy moving forward!!

NonprofitER

  • Stubble
  • **
  • Posts: 220
  • Location: Texas
  • Reaching FIRE w/ High Purpose (Low Pay) Nonprofit
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #3 on: February 08, 2021, 07:42:56 AM »
Given that you like the home and want to keep it, and like being a property owner for investment properties (per your AirBnB), I'd probably cash out and use the equity to buy more real estate. This assumes you are good with self-managing the property when/if you move in with your partner, and want to grow your RE investments.

You might get more responses if you post the same question on the Bigger Pockets forum also.

NOVAMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #4 on: February 08, 2021, 09:14:14 AM »
Given that you like the home and want to keep it, and like being a property owner for investment properties (per your AirBnB), I'd probably cash out and use the equity to buy more real estate. This assumes you are good with self-managing the property when/if you move in with your partner, and want to grow your RE investments.

You might get more responses if you post the same question on the Bigger Pockets forum also.

Thank you @NonprofitER I appreciate your feedback and advice.

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1294
  • Location: Midwest
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #5 on: February 08, 2021, 02:44:29 PM »
So did you just buy this home? Or just Refinance it? I assume you either put down a ton of money or had great appreciation to have that much equity in such a short time.

I think your current situation is fine. You are living pretty much rent free in an expensive city that is a win. There are some tradeoffs in sharing your home with others, but it sounds like you are ok with this.

From what I see this is not a great rental. If you move out and make it complete rental factoring in management/vacancy etc your expenses = revenues. If you want to move you need to sell this. You will net some awesome tax free capital gains. The only reason this is working for you as you are young and flexible? So living with others is not a huge deal for you, or for them. When you start treating this like a rental and not a house hack the numbers do not work.

My advice sit on it for a few months? DC RE might go crazy and you might be able to sell for even more. This of course assumes you have lived there 2 years for the capital gains exclusion.  Sounds like your life situation might change and you might not need the house anyways. I guess my point here is don't hang onto this house to force it into a rental, if you are going to keep it, you should only do it as a place to live.

Refinance: Meh, maybe? I mean your rate is fine. I guess if you really need the cash sure? Do you think you have RE opportunities that are worth going for right now? I guess nothing has gotten me excited especially during/post pandemic. Owning RE has been great, buying RE less so!











SndcxxJ

  • Stubble
  • **
  • Posts: 116
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #6 on: February 09, 2021, 07:23:35 AM »
I wouldn't bother refinancing for a lower rate.  Your rate is good, and paying closing costs again will take a while to get an actual return for the modest adjustment in rates you might get.
If it was me I would be on the hunt for another investment, probably real estate.  If you are handy and have a little time finding something that needs work might make a cash out refi worth the trouble.  To fund the next property (before refinancing the first) I would investigate HELOCs, private loans/hard money loans.  Those can all close quickly once a property is identified, then refinance those loans and the first mortgage into a new 30 year fixed at your leisure.
However, there is a real chance you might not find a good deal on real estate right now.  I would be hesitant to pull out money and let it sit in the bank while you hunt because paying +/-3% on that money while you hunt for a good deal isn't for me.
My last idea for you to consider is a cash out refi and put those funds into a board index fund for the sake of diversification.  You already own two properties, and some folks don't want to over expose themselves to real estate.  Do you already have much in the way of stocks/bonds?
This last option really isn't for me so much because I want to have sweat equity options at my fingertips, but I do put extra cash in index funds while I build up enough for a solid real estate purchase.

trollwithamustache

  • Pencil Stache
  • ****
  • Posts: 931
Re: Cash out Home Equity or Keep Paying down the loan?
« Reply #7 on: February 10, 2021, 10:00:13 AM »
By house hacking you set yourself up to be cash flow neutral on your housing, and you achieved that. Which is AWSOME. You hit your plan. A lot of these ideas are now about totally re-writing your plan, which may be fine, but make sure you think it through very well before doing that. Do you want a new plan?

If you are staying put, re-fi to get cash flow positive would be worth the closing costs. (ie you'd be there long enough to earn it back). and it would be a refinement of your existing plan.