I’m looking at buying a triplex to rent out to students. I was able to get 100% financing, however the rates are crazy high (i.e. 9.5-10.5%). I’m thrilled that I won’t need to put any money down, but now the numbers don’t work.
I just received a line of credit from my bank a few weeks ago (because I am getting into the investmnet real estate game, and I figured that I would need it), and I can fix the line of credit at 7.4%…basically turn it into a home equity loan.
I am wondering…has anyone ever purchased a house with their line of credit. I believe that some rule states that you can’t do it. However, if I were to do it, it might make sense. I would use the line of credit to put down 20% of the purchase price, which would get me down to respectable interest rate levels, and avoid PMI. The montly mortgage payment for the house PLUS the equity loan would be way less than the payment I would have had with 100% financing, because of the high interest rate. It would still be no money down, but in a different way, since I would be using my line of credit for the down payment.
The conventional 100% option is now harder to qualify with interest rates out of line for most investors needing to cash flow. (unless buying well below market value).
Anything you can avoid doing to have the higher rate would be advised.
You could always refinance to combine both together as your equity increases. This would free up your line.
What has your mortgage planning consultant advised you so far?
You absolutely can buy a home using you line of credit. Make sure you factor the higher debt from the draw into your DTI. Also know that if you refinance to pay back the line this will be considered “cash out refinance” so you’ll have to let the title season for 6-12 months.
The reason the rates are in the 9’s on the one loan at 100% is because it is a blended rate. If you did 80/20 the rate on the 1st would still be 6.750 - 7.5% but on the 2nd you get creamed at 12-15%.
Another approach not mentioned is to use the LOC to:
a. Buydown the interest rate to the point you can cash flow.
b. Fund downpayment to get into a 90-95 LTV program that allows you to cash flow.
Whether this makes sense depends on holding period and exit strategy.
The issue I have with funding the entire purchase with a variable instrument is the “what if” factor—as in what if something changes and you can’t refinance out of it (and in this market, changes are daily occurance). Using this type of loan for long term borrowing isn’t advisable and any short term gains you could realize in appreciation could be minimized by the increasing interest rate/monthly payment that will result from using a variable loan program.
I suggest that you only use the LOC as outlined above, add value to the property to support an increased appraised value and then refi (and buy out of the LOC).
There are still a handful of lenders that will do cash out refinances with no seasoning of title.
Just to reiterate Scott’s point. You dont want to use option A he mentions unless you plan to hold the loan long term. Buying down your rate would not make sense if you plan to refinance the loan in a short period.
Thanks for the advice everyone…I’m still a bit confused. However, this is what I gathered, and what I might do based on your feedback…let me know what you think:
-Purchase the 350K property with 20% down at 6.875% for 30ry fixed
–Total monthly mortgage payment including Taxes and Insurance = $2300
-Use my LOC for 33K, and cash of 37K to reach the 20% (the seller is covering all closing costs)
-Turn my LOC into a Equity Loan of around 7.4% fixed for 20 years (That is the deal that I get from PNC…the ability to turn LOC into a Home Equity Loan at a fix rate)
-Home Equity Loan per month = $263/month
-Total Monthly payment: $2300 + $263 = $2595/month
-Cash flow would be $4500 (rent/month) - $2563 = $1937
I agree with Ben. With such a strong cash flow, you would be well advised to save your LOC/cash for future investments and only use enough to enable a 90% loan; yes your payments will be higher on the mortgage especially with PMI but you will have reserves with which to pursue another property or to take care of any unforeseen circumstances with this one.
I thought most conventional banks will not allow borrowed funds (ie. Line of Credit) to be used for a down payment. Most banks like to see at least 60 days seasoning of your down payment funds. Correct?
There is still some things you have left out, namely how you intend to document income/assets/employment, current and future DTI, etc. but given your comments, I’m going to assume:
Your scores are => 680
Your final DTI is less then 30
You intend to go FULL DOC
I’m with the vast majority here, with a projected cash flow as you suggested, the violitility of LOC rates, etc., you are far better served increasing your an allowance for a higher interest rate and decreasing your vested interest (down payment).
There are number of different approaches you could take, here is just one of the many that might be available to you:
Documentation: No Income / No Assets, No Documentation
Mid FICO: 700
Credit History: Very Good
DTI: N/A
Active Trades Required: 4
Occupancy: Non-Owner Occupied
Loan Amounts Allowed: $10,000 - $650,000
Lien Position: 1st Mortgage
Max LTV Allowed: 90%
Max CLTV Allowed: N/A
Property Types Financed: SFR, Condo, PUD, Duplex, Attached SFR/PUD, Non-Warrantable Condo, High Rise Condo
Amortization Schedules Available: 15 Years, 20 Years, 30 Years
Loan Available in: AL, AZ, AR, CA, CO, CT, DC, DE, FL, GA, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI, WY
Special Features:
Borrower Owns Over 10 Properties
No Reserves Required
No Seasoning Required on Funds to Close
Interest Only Payments Available
Less than 12 Months Seasoning Refi, (using purchase price)
I have a similar question that I was hoping someone viewing this thread could help me with.
I’m planning on buying a property ENTIRELY with funds from another property’s (or properties’) equity line(s). So I’d technically own the purchased property out right.
I’d like to then do a cash out mortgage on that purchased property for ~75-80% LTV.
Would it make sense to wait 1 year before taking out the mortgage? (i.e. Would the terms be much better?)
My credit is excellent and the property’s cash flow is very good.
Should I be able to get good terms for something like this?
You’ll get excellent terms when buying like this. There is a program that will allow you to refinance within 90 days of purchase getting back only the funds used to purchase. The rate is based on a no cash out rate and the ltv is determined by value and not sale pricem (no seasoning). Any additional cash needed over the purchase price would either need to be done with another lender’s second mortgage along with the above. Or you could just consider going with 1 lender who has no seasoning and can do as just 1 loan getting back all the cash you need.
The one thing I forgot to mention is that the properties (there’s actually 2 or 3) that I’m planning to do this with are only worth 50-60K each. Would a lender still be interested with a price this low?