Author Topic: How to use my home equity for a down payment  (Read 11385 times)

dizzean

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How to use my home equity for a down payment
« on: August 21, 2013, 03:17:58 PM »
I bought my house a year ago for $60k @4%.

It now has a value between 80 or 90k.  I want to get into real estate to generate the passive income needed for FI.

My wife might be getting a job near mine which would allow us to move, get rid of a car, and both bike to work.  I would love to keep our current house and rent it out (for between $1200 and 1400 depending on what work we do with it).

We just started our path to FI a year ago, so we don't have a large chunk for a down payment because it's been going towards our student loans.

My question is, is it possible (advisable) to either refinance and cash out our equity(likely at a rate of 4.75) or take out a HELOC to assist with making a down payment on a new house?


zinethstache

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Re: How to use my home equity for a down payment
« Reply #1 on: August 21, 2013, 04:17:11 PM »
I am doing just that with our primary residence. We have alot of equity in it and absolutely do not want to sell.  If you do a full refi you will have to pay fees, so do the math on that option carefully, also factor in your higher interest. We're already re-fi'ed at 3.875%. So after researching, we settled on doing a 3.99% variable rate HELOC at 85% LTV. We will use this as the down for 2 rentals OR one SFH purchase if the right deal comes up. I am not sure how well it will work with the amounts you are talking about (60k to 90k value). My lender will go 100%, but above 85% the interest rates climb up pretty fast.

Also consider the cost of the appraisal. I paid $380 for it. I have to factor that in to the cost of getting this money. I was confident that my valuation would come back very high so that fee was nominal in the grand scheme of things.

I am curious what others will say. The rate I have is variable and the market is ever changing. I do have a plan to pay down the amount with our rental income - not just the unit/s we buy, but will likely do the full on ALL rental income pay down sometime after next year, in the mean time we will be paying the interest only payment. We still live on a portion of our working income while our investment income is being recycled and used for investing. Some day sooner than later our investment income will be enough to go FI...but that is still many years away.

Ahh, now keep in mind too that you will need to get your money, put it in the bank and age it 90 days. The lender for your investment property will insist on knowing the source of your funds for down payment and 6 mos. service. I've already told my lender my plans and have emailed them our new HELOC schedule since I will likely be purchasing prior to the 90 day aging most lenders adhere to. I have been pre approved based on the new HELOC.

Lots of details to work through. Make sure your DTI still works out with whatever your HELOC payment will be:)  The best of luck to you!

Daleth

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Re: How to use my home equity for a down payment
« Reply #2 on: August 21, 2013, 04:33:50 PM »
What Zinethstache said. Also, your monthly payment on the HELOC (as well as the monthly on your existing mortgage) will be factored into your ratios just like any other required payment, so your income and the new home's price has to be such that in effect you can qualify for both at the same time.

Undecided

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Re: How to use my home equity for a down payment
« Reply #3 on: August 21, 2013, 06:00:03 PM »
For what it's worth, I'm in the middle of taking on a Charles Schwab/Quicken HELOC, and they'll do the same ~4% current interest rate at 80% LTV and they'll pay all the costs (including appraisal), but I don't know what their minimum line is, and that may restrict your choices.

dizzean

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Re: How to use my home equity for a down payment
« Reply #4 on: August 21, 2013, 07:52:24 PM »
We would pay down the HELOC right away.

My only question now is, would it be wiser to start our real estate portfolio now or pay down our 20k (5%) student loans first?

Another Reader

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Re: How to use my home equity for a down payment
« Reply #5 on: August 21, 2013, 08:51:24 PM »
What you are saying is your house appreciated between 33 and 50 percent in one year.  Unless it needs a lot of improvements or the property taxes are ridiculous, you have something that will likely cash flow when you convert it into a rental, especially with that 4 percent loan.  What would a replacement home close to work cost?  Have you sat down with a lender to see if you can qualify, given you are keeping the old house and getting a HELOC for the new house?

Although your market may still be appreciating, it's not likely to see the same percentage returns in the next year as it did in the last year.  It might make more sense to stay where you are, knock the student loans out, and then start working on the down payment for the new house.  Less risk and more flexibility because of less debt.

dizzean

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Re: How to use my home equity for a down payment
« Reply #6 on: August 21, 2013, 09:18:26 PM »
What you are saying is your house appreciated between 33 and 50 percent in one year.  Unless it needs a lot of improvements or the property taxes are ridiculous, you have something that will likely cash flow when you convert it into a rental, especially with that 4 percent loan.  What would a replacement home close to work cost?  Have you sat down with a lender to see if you can qualify, given you are keeping the old house and getting a HELOC for the new house?

Although your market may still be appreciating, it's not likely to see the same percentage returns in the next year as it did in the last year.  It might make more sense to stay where you are, knock the student loans out, and then start working on the down payment for the new house.  Less risk and more flexibility because of less debt.

This is my other option.

I'm not concerned with what I would qualify for, we actually qualified for this house under just my wife's income as I was a contractor at the time and they couldn't consider my income, so we had to fight hard for the house, but we got it, and she is the only one on the mortgage so my DTI is good and I make 40k a year.