Refinance or HELOC

[pressure]

Hi everyone, have a question about using the equity in my home to fund a downpayment for an investment property. My mortgage is 89000 but the home is worth about 150,000. Should I refinance and take extra out or refinance the mortgage at a much lower rate and then use a heloc?

Thanks in advance

 

[Thomas Beyer]

QUOTE (pressure @ Feb 24 2010, 12:37 PM) .. or refinance the mortgage at a much lower rate and then use a heloc?
use a 3rd option:

no mortgage .. just an HELOC ..

for a new investment lender needs to see CASH IN BANK FOR THREE MONTH .. so if you are serious about using the extra 31K for investment have it in cash in a bank account or T-Bill or money market fund !

 

[bizaro86]

QUOTE (ThomasBeyer @ Feb 24 2010, 12:52 PM) use a 3rd option:

no mortgage .. just an HELOC ..

for a new investment lender needs to see CASH IN BANK FOR THREE MONTH .. so if you are serious about using the extra 31K for investment have it in cash in a bank account or T-Bill or money market fund !

Thomas, I`ve seen you post this recommendation a few times, and I`m not sure I understand why. Do you feel the interest-only nature of a heloc makes up for the higher interest rate than a variable rate mortgage?

Consider a $100,000 loan:

Variable rate mortgage@ 2.05%, 35 year amortization
Payments: $340/month, $170 interest, $170 principal

Heloc@ 3.25%, interest only
Payments: $270/month, all interest

So on the Heloc your monthly payment is $70/month less, but you`re paying an extra $100 of interest.

Put another way, if you take the variable rate mortgage, you`re paying an extra $70/month, all of which is principal, plus converting $100 of your payment from interest to principal, which increases equity buildup.

Granted you can`t pull money out again if you do the mortgage instead of the heloc, but the original poster was talking about a <200,000 loan, where the principal paydown over the 5 years probably wouldn`t be enough for another downpayment anyway.

If there is something I`m not understanding, I`d love to be enlightened!

Michael

PS: I used rates from PCfinancial in my post. They may not be exactly what you`d get from a broker, but I bet they`re close.

 

[MikeMcC874]

QUOTE (ThomasBeyer @ Feb 24 2010, 02:52 PM) for a new investment lender needs to see CASH IN BANK FOR THREE MONTH .. so if you are serious about using the extra 31K for investment have it in cash in a bank account or T-Bill or money market fund !

Not all the banks require the money in the bank for 3 months. I refinanced to 80% and used that money for the 20% down on the rental, my bank had no problems.

Mike

 

[MikeMcC874]

QUOTE (bizaro86 @ Feb 24 2010, 03:12 PM) Granted you can`t pull money out again if you do the mortgage instead of the heloc, but the original poster was talking about a <200,000 loan, where the principal paydown over the 5 years probably wouldn`t be enough for another downpayment anyway.

A re-advancable mortgage lets you `immediately` access any principle you pay down with your mortgage payment. Have a look at Scotia`s STEP mortgages. There are others too.

Mike

 

[KevinMatwichuk]

Be careful with HELOCS. They show up on your credit report report as do re-advancable mortgages. In my experience non-readvanceable mortgages do not. This can have a significant effect on you FICO score. Ask me how I know.

If I was to do it again I would go for the Refi.

 

[Thomas Beyer]

QUOTE (bizaro86 @ Feb 24 2010, 01:12 PM) Thomas, I`ve seen you post this recommendation a few times, and I`m not sure I understand why. Do you feel the interest-only nature of a heloc makes up for the higher interest rate than a variable rate mortgage?..
good point.

I assumed (incorrectly) that the rates are similar as they used to be. This is now different today. So, yes, if the spread is 1% or more than a large portion of your debt should be a mortgage.

However, a large portion, maxed out to 80%, should always be a LOC .. even if UNUSED !