A client emailed me and told me about a plan a mortgage broker proposed to him. He has about $200,000 in equity in a rental and is being told to pull out $150,000 for investment. The message was “You can’t let that equity sit there and not work for you.” You actually can let it sit there and work for you if it is part of your retirement plan or another financial plan. But I digress.
The awful part of the message, as if the aforementioned was not bad enough, was the advice for the client to give up a 7 year arm with 3.5 years to go at 4.75% and take an option arm. If you are not familiar with an option arm, it is a loan that gives you four options each month: three of the four options have interest rates that are higher than you can get almost anywhere else and the fourth one creates negative amortization. This means that your balance goes up each month by the difference between what you pay and the interest only amount you should pay based on the interest rate. This also leads to paying interest on the interest you haven’t paid. To sum up the interest rates for these types of loans are in the high 6% range to the low 8% range.
The broker also projected an anticipated cost (loss) of about $20,000 over 5 years.
This number is based on absolutely nothing that can be substantiated. Don’t gamble; stick to your plan. If you really don’t have a plan or you are confused about a wonderful scheme cooked up by someone who is trying to sell you something, ask.
What would you recommend for the following situation:
I own a rental property in Los Angeles, Ca which is worth $525,000. I bought this home for $130,000 18 years ago. I have a 1st TD of $101,665 with an adjustable rate of 7.625% and an SBA loan of $17,282 with a 3.625% interest rate.
If I sell this property and use the money to buy and sell distressed properties I will pay a substantial amount in capital gains. If I get a HELOC I will have to pay off the SBA loan with the line of credit at an interest rate of 8%.
To help you out with the question about your second mortgage.
Yes you would wind up with a much higher interest rate, but at that loan size it won’t hurt you much at all. The difference between your current interest rate and a 8% rate would only be $60/month. If it doesn’t work to sell, but you still need the equity, then it won’t hurt you much to refi that 2nd.