Hello all, great board you seem to have here!!! :beer
I was hoping that somebody could help me with an issue I’ve run into. I want to use equity from a property towards a second one, but really have no idea on which path to go and how to actually do it!
Specifically, I have (presumably, haven’t determined how to get the equity, so no appraisals done yet) roughly ~$40-50k in equity from a house purchase from last year. It was a very run down property that was fully renovated, not a full gut job, but basically the most extensive face lift type, if that makes sense.
With houses being so cheap in the area right now, I really want to grab something else, but have no idea how to approach getting the cash out of this one (or maybe I should pledge its equity as collateral or something? So confused!!).
Here’s the specifics:
- gross spread should be between 40-50k depending on appraisal (do they typically loan you out higher than a real appraisal on equity lines, or do they compute as if they had to sell your house tomorrow? Does immaculate credit play into that?)
- costs incurred during renovations were roughly $11k (materials, did all the work here w/o bringing anyone in)
- houses that I’m interested in getting to rent out are going real low in an area kinda close to me, like $60-75k for a tiny one, so with an investment loan I feel the equity (net equity) would sufficient to get in here (also employed full time, high fico, etc)
- house that I want to take cash out of was purchased ~10-11 months ago, at a low price (is that gonna come into play when they look at comps? Will they factor in that the house was a wreck at the price purchased?), as a primary residence. It truly is a primary btw, that’s not messing around or anything, I plan to keep this for at least a couple years (well, more like exactly 2 years for the IRS121 :bobble).
Any ideas would be great and very much appreciated. I’ve just been noticing places that are steals, know there should be a good chunk of equity here, and that credit/income should allow the cash to be pulled out. I think there’s enough room to make this work, but have no idea if I’m looking at a collateral type thing, a home equity line of credit, a 2nd mortgage, or just completely refinancing at 100ltv. Again, thanks in advance for any help!!
No one could give you an accurate answer without knowing the fair market value of your existing residence.
For example, if the value of your existing residence is $800,000 to $1,000,000, then your 40-50K in appreciation means that you are still leveraged 95% loan to value, and additional financing may be hard to get. If the value of your existing residence is $80,000-$100,000, then you can get a second mortgage or a home equity line of credit no problem. The best move for you, in my opinion, is to find a book about real estate financing, study it, and sit down and talk with between 5 and 10 mortgage brokers. The money that you pay a mortgage broker is often times recovered because you ultimately get a much better loan than if you walked into a commercial bank.
Others on this website suggest that you form a relationship with the loan officer and president of a small, local bank. By keeping all of your accounts with a small, local bank (or savings and loan, or credit union), these folks can essentially write a loan with any terms that they want, and they may favor you if they have several good reasons to trust you.
You should also look into the possibility of seller financing or seller carry backs. In these loans, the seller either accepts no money or less than the purchase price, and the buyer and seller work out their own loan agreement. For example, if the seller owns the place outright, the seller may trust you and let you mail monthly payments to him or her. The buyer gets the loan and the house, and the seller, instead of taking the lump sum of the selling price, gets a steady income stream, the amount of the selling price, and interest. If the seller does not own the place outright, the seller can reduce the selling price by, let’s say, 15%. The buyer can then put 5% down, make monthly payments to the seller for the 15%, and payments to the bank for the other 80%.
The “best way” depends on a lot of information that you did not provide. The loan to value percentage of your house, the debt to income ratio of your personal finances, how leveraged you want to be with your second house, and a lot of other things that have to do with risk tolerance and personal goals.
Oh I’m sorry I forgot to include value :banghead :banghead
Loan is for ~100k and house should, hopefully, appraise @ 140-150k.
I’ve read a ton on the subject, to be fully honest, both from college (real estate course, the realtor prep course basically) and a ton from books by john reed, as well as many others from assorted authors.
I know my options and everything, but now that I’m finally in this position, and the renovations are almost complete, I’m feeling brain dead on how to approach this, what method to do, etc etc… I think it’s partially just overwhelment with it having gone quasi-smooth (took about 3 times longer to complete, and twice as much in repair materials, as expected, but I knew to expect that :cool).
I had consider seller options but, in the end, the vast majority of what’s available for me to grab in the area I want are places that were foreclosed. I’m not very interested in doing short sales at this point, I just know there’s a ton of places that are going for prices that really work, and would like to just get into a normal 30yr fixed with my equity from this place. Unfortunately I don’t know any mortgage brokers to talk to or anything, and figured I could get far less biased advice here to help set me on the proper course before actually sitting down with a broker. I think if I just had a better idea about why I’d want 1 option over the others it’d make things clearer.
(it’s crazy because I’ve studied this stuff for sooooo long before I ever tried acting on it. Got to the point I felt like I knew everything on it but still hadn’t acted, finally did, and now that crunch time is coming I just feel clueless :shocked )
It kinda looks like paralysis by analysis. :shocked. I think you said in your post it is your primary residence. With rates going down, you could refinance and get cash out. The bank will do an appraisal (make sure you get a copy). That’s the only way you’ll know what its worth. Different banks have different refinance LTV’s depending on your situation (credit,income, etc…). If you can handle the added payment of the cash out refi. You should be good to go. Don’t overthink it. Good luck.
Would there be any advantage to a home equity line of credit? I guess I’m also a little confused on why there’s 1st and 2nd mortgages, like why would I refinance the entire thing instead of just getting a second mortgage? Seems that, even if I could get a lil lower rate on a full refi, the loan costs would totally negate that benefit of a lower i rate.
I just got a HELOC on my personal residence. After talking to numerous banks, credit unions, and brokers, I ended up with 100% LTV with a 7.35% fixed rate for 7 years. I have 5 years after the 7 to pay off any remaining balance. Most lenders will only offer up to 90% LTV. I found 3 that offered 100%, but my credit union was the only lender that offered a fixed rate. Variable rates will be prime +2. Bottom line, make alot of phone calls and find the best deal. If you only make a few phone calls then you’re screwing yourself. Be careful about putting your personal residence on the line. Pay off the HELOC as soon as you can. I would act fast though, as good HELOC terms are disappearing.
You don’t know when you’ll find a deal so it makes no sense to me to refinance or get a second mortgage. You’ll have to pay interest on that money when you’re not using it. Bad idea to me…
I’ve heard of people doing a no cost refi. I’ve never done that. If you can get a fixed rate on a HELOC that’s great. Just be sure you can pay it off in the timeframe allotted. When I refinanced last year, I paid $1600 in loan costs and $10,000 cash out. My mortgage only went up $150/mo. You have to weigh the added cost for any added debt. Keep in mind that taking on more debt will not help you if your investments don’t produce cashflow to pay for it.
In real estate it’s about having access to money, not necessarily having money. I have access to the same $10,000 that phlemboy does, except I’m not paying a dime for that capability. Refinancing also increases your debt to income ratio, and that added money won’t be counted as income. I would refinance an investment property, but I would avoid refinancing your residence for the purpose of buying other real estate. I try to keep business assets separate from personal assets. At the end of the day I want to know I have a place to call home.
I agree with you artyman1200 on keeping things separate. However, sometimes you have to access the resources you have. It all depends on your debt to income ratio before getting into more debt. I look at this way. If my only options of getting $10,000 for investments were to work and save until I got it or accessing equity to get me started, I’d rather get started ASAP. As long as I can be sure I can cover the added debt and it won’t blow my debt ratio. The money has to come from your pocket in one way or another until you can get another property with the income to support itself and a future investment. Each person is different.
I hear ya. I was just making an observation. You gotta do what you gotta do…
Very, very useful opinions!!! Thank you guys so much!! :beer
Regarding mingling the personal residence with investments, well, in essence this is only a quasi-personal residence. I mean, it is, and it’s financed that way, but I don’t plan to stay here for a while, this house was bought to make cash and to give shelter for the next couple years, so it’s not quite a personal residence nor is it quite an investment, if that makes sense. Basically just got out of college, wanted to embark on real estate investing, and, needing a place to stay once I moved out of my college apartment, seemed smart to make my next place a good buy on a house instead of an apartment, which’d allow me more cash to roll into the second place :).
Again, thanks a ton for the advice and personal stories on the matter, if anyone else has personal scenarios or tips please feel free to toss them in there!!
I forgot to ask - what is a rough turnaround time from contact to cash? By that, I mean if I determine who I’m gonna use for the money today, what is the general time it would take?
(just curious to get an idea so I know when I should start scoping more places :))
If expediency is your concern (contact to cash as you put it), the HELOC wins hands down—you can secure cash in about 7-10 biz days as opposed to 30 using this route…
Very nice!! I was thinking that myself, I was kind of concerned that HELOC’s were more for, like, renovating your own place, I wasn’t sure if it was basically just pure cash loan with the equity as collateral, that could be used as you please (like, say, on another place ).
Just realized I’ve got 1 more question!!
I don’t want to ‘shop’ around with my credit, as I don’t want a ton of inquiries on my profile, so I’m likely to figure out my favorite couple before having any personal info run.
Given that, is there going to be any variation in amounts offered based upon which route I go? By that, I mean are any of the options I listed (home equity line, second mortgage, new mortgage, etc) likely to approve a higher value? I know they’re all going to appraise, but I don’t know whether any may allow, in a typical scenario, say, a higher loan amount or a higher permissible LTV%.
I know all is based on the appraisal, but I just can’t help thinking that all of those options aren’t going to be identical when it comes to the bottom line of how much cash they’ll loan…
(****Oh! I forgot to add something else…
I can get most any of those varied types of loan products from many different companies, whether it’s bank of america or some small operation. Is either route here going to potentially/possibly/maybe offer a higher loan amount? I’m just figuring that between all the banks/lenders, of varying degrees of quality, and the varied loan products I’m contemplating, that some will end up with more cash for me to use towards my next, so I really want to make this work as well as possible!!)