Author Topic: Stumped on refi - cash out or rate/term  (Read 1509 times)

Yinzer

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Stumped on refi - cash out or rate/term
« on: August 20, 2016, 10:32:42 AM »
I am in the process of refinancing and the home appraised for a lot more than I anticipated. Our ultimate goal is to start acquiring rental properties and the current home would make a great one when we vacate it in a year or two. Ideally we would find a solid duplex or triplex to purchase as owner-occupied (no young kids at home) then after a year or so move to a nice single family and have 2-3 rental units working for us.

By refinancing to a conventional loan from the FHA this home was purchased with, I have been wondering if I would then qualify to purchase the next place with an FHA loan and not be required to put 20% down. This is still uncertain.

Here are the quick numbers:
Current home: ~$53K with 22 yrs left on a 30 yr term at 5.5%. PITI payment is about $525/mo.

Option 1: rate/term refi at 15 yr term 2.875% fixed. Payment goes up about $30 to about $580 (PITI). Cool. This fit well with anticipating renting the place for about $750-$800 in a year or two when we move and leaves some decent cash flow.

Option 2: cash out refi at 15 yr term 3.125% fixed and take balance up to 80% LTV. This would net us about $9,200 at closing and give us a new payment of $610 (PITI). That money would be stuffed into a taxable account or high-yield savings until we move, then used as a downpayment on a larger multifamily home. It could help us avoid PMI if the FHA route isn't a possibility.

*Currently we have about $30K in cash and anticipate the multifamily will cost $200K-$260K when we buy. We also have $65K in student loans at 6.2% and another $18K at 2.2% which we are actively paying on. I should note while many will say this is a hair on fire situation, I feel we are trying to pull the FI slingshot back now which will help accellerate everything over the next few years (case in point - If I had $65K in cash I would be more likely to buy a rental outright than pay off the high rate student loans because of the tax advantages and appreciation).


Simpli-Fi

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Re: Stumped on refi - cash out or rate/term
« Reply #1 on: August 20, 2016, 11:10:15 AM »
Rental income is all about cash flow.  Have you considered a 30 year fixed that lowers your payment, which would increase your monthly cash flow?

Another Reader

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Re: Stumped on refi - cash out or rate/term
« Reply #2 on: August 20, 2016, 12:50:12 PM »
Before you do anything, please spend some time learning about rental property income and expense and the 50 percent rule.    A property that rents for $750-$800 and has a $580 or $610 mortgage payment will be cash flow NEGATIVE.  Sword Guy recommends Gallinelli's book:  https://www.amazon.com/Estate-Investor-Financial-Measures-Updated-ebook/dp/B018HOKXBG/ref=sr_1_1?s=books&ie=UTF8&qid=1471718281&sr=1-1&keywords=gallinelli#nav-subnav  for beginners. 

Student loans at 6.2 percent are a hair on fire emergency.  It's not likely with the numbers you describe that you will come anywhere close to that yield with this property, even with appreciation.

FHA loans have mortgage insurance.  It now stays in place for the life of the loan. It's generally not the best option if your credit is decent.

In your shoes, I would conclude that now is not the time to grow the rental portfolio.  I would refinance the house on a 30 year mortgage and get cracking on the student loans while learning as much as I can about the rental business..

KickingRocks

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Re: Stumped on refi - cash out or rate/term
« Reply #3 on: August 20, 2016, 08:38:49 PM »
Me personally I'd do option one.  I've never been a fan of pulling money out of a house unless it was done by selling it.  Kind of like robbing Peter to pay Paul.  I know everyone talks about investing as much as possible, but another key note to remember is also to be diversified.  Having some equity in Real Estate never hurts. I'm 34 right now and currently have over 200k of equity in my home.  In two years it will be paid for and worth between 375k and 400k.  At that point we will roll everything over into another more expensive home and keep the balance on a 5 or 7 year loan.  I plan on rinse and repeating this every couple years until we are 60 and ready to retire.  At that point we should have a 1 million dollar home free and clear.  We plan on cashing out at that point and either buying a lake/beach house or maybe some land.  My wife and I will both have pensions, 401k, IRA's, and taxable accounts with several million also. So the paid for house is just a little diversification for us.

Simpli-Fi

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Re: Stumped on refi - cash out or rate/term
« Reply #4 on: August 21, 2016, 12:28:17 AM »
Me personally I'd do option one.  I've never been a fan of pulling money out of a house unless it was done by selling it.  Kind of like robbing Peter to pay Paul.  I know everyone talks about investing as much as possible, but another key note to remember is also to be diversified.  Having some equity in Real Estate never hurts. I'm 34 right now and currently have over 200k of equity in my home.  In two years it will be paid for and worth between 375k and 400k.  At that point we will roll everything over into another more expensive home and keep the balance on a 5 or 7 year loan.  I plan on rinse and repeating this every couple years until we are 60 and ready to retire.  At that point we should have a 1 million dollar home free and clear.  We plan on cashing out at that point and either buying a lake/beach house or maybe some land.  My wife and I will both have pensions, 401k, IRA's, and taxable accounts with several million also. So the paid for house is just a little diversification for us.

Moving is expensive, title insurance, closing, furniture (as your house seem to get bigger), etc...it sound like you want to pay that expense 4 or 5 more times while working.  Why not just buy your million dollar home when you can?  Also you are assuming you'll never lose money in real estate and then someone will want to buy your million dollar home.

KickingRocks

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Re: Stumped on refi - cash out or rate/term
« Reply #5 on: August 21, 2016, 11:16:17 AM »
Me personally I'd do option one.  I've never been a fan of pulling money out of a house unless it was done by selling it.  Kind of like robbing Peter to pay Paul.  I know everyone talks about investing as much as possible, but another key note to remember is also to be diversified.  Having some equity in Real Estate never hurts. I'm 34 right now and currently have over 200k of equity in my home.  In two years it will be paid for and worth between 375k and 400k.  At that point we will roll everything over into another more expensive home and keep the balance on a 5 or 7 year loan.  I plan on rinse and repeating this every couple years until we are 60 and ready to retire.  At that point we should have a 1 million dollar home free and clear.  We plan on cashing out at that point and either buying a lake/beach house or maybe some land.  My wife and I will both have pensions, 401k, IRA's, and taxable accounts with several million also. So the paid for house is just a little diversification for us.

Moving is expensive, title insurance, closing, furniture (as your house seem to get bigger), etc...it sound like you want to pay that expense 4 or 5 more times while working.  Why not just buy your million dollar home when you can?  Also you are assuming you'll never lose money in real estate and then someone will want to buy your million dollar home.

I've always built new so the builder has always picked up his share of closing and paid for the title insurance.  On my end I've used a hard money lender twice that only charges $800 in closing cost.  It's awesome.  Just go in and sign 3 papers as long as the loan is no more than 11 years.  I can't argue with you on furniture, but if you take care of your stuff it will either last or you will get a decent amount of money selling it used.  I know when we moved last time I was surprised how much people where willing to pay for our used furniture.  That made moving extremely easy and cheap.  Just have the furniture store deliver all the new stuff to your house.  Only thing we moved was our clothes and my stuff in the garage.

Building new has several benefits.  Biggest one in my opinion is the warranty.  Our current house has a two year turn key warranty.  I don't even have to replace a light bulb for the first 2 years and after that all mechanical systems and structure has a 10 year warranty.

As far why I don't go huge now?  It's really just a journey to us.  As you grow your styles change and what you like changes.  So moving every couple years allows us to always have what we want and like.  I really want a pool and hot tub right now, but will wait till the next house simply because our kids are still a tad to young and I wouldn't be able to sleep at night always worrying about the pool at their current age.

Simpli-Fi

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Re: Stumped on refi - cash out or rate/term
« Reply #6 on: August 21, 2016, 02:41:20 PM »

It's really just a journey to us.  As you grow your styles change and what you like changes.

Fair enough, and great response... You'd understand my wife, ha!  I'm too simple and stubborn

Yinzer

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Re: Stumped on refi - cash out or rate/term
« Reply #7 on: August 26, 2016, 07:28:56 AM »
Thank you for the responses here. Decided on a 30yr at 3.5% with a PITI payment of $400, which will not only allow it to be the most appealing rental possible (<50% gross rent), but also free up a little cash while we're living here to put toward the student loan payment.

Dicey

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Re: Stumped on refi - cash out or rate/term
« Reply #8 on: August 27, 2016, 07:54:02 AM »
Thank you for the responses here. Decided on a 30yr at 3.5% with a PITI payment of $400, which will not only allow it to be the most appealing rental possible (<50% gross rent), but also free up a little cash while we're living here to put toward the student loan payment.
Excellent choice! Before you throw the extra cash at the S/L, re-fi that 6.2% bloodsucker.

Note to KickingRocks: Good grief, so much of your post is excruciatingly facepunch-worthy! I hardly know where to begin. A brand-new house filled with brand-new furniture?  Is there a brand-new car in the driveway, too? Gah!
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Yinzer

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Re: Stumped on refi - cash out or rate/term
« Reply #9 on: August 27, 2016, 11:52:48 AM »
Thank you for the responses here. Decided on a 30yr at 3.5% with a PITI payment of $400, which will not only allow it to be the most appealing rental possible (<50% gross rent), but also free up a little cash while we're living here to put toward the student loan payment.
Excellent choice! Before you throw the extra cash at the S/L, re-fi that 6.2% bloodsucker.

Note to KickingRocks: Good grief, so much of your post is excruciatingly facepunch-worthy! I hardly know where to begin. A brand-new house filled with brand-new furniture?  Is there a brand-new car in the driveway, too? Gah!

Thanks. We tried to refi the loan through sofi back in February and it didn't work out for a few reasons. Will have to find a way to get that done.

Dicey

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Re: Stumped on refi - cash out or rate/term
« Reply #10 on: August 27, 2016, 08:35:53 PM »
I'm no SL expert, but I know so-fi is not the only game in town. I'm sure other readers with more experience will be happy to share their tips.
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...