mortgage guys (or anyone really) - home equity question (1 Viewer)

[the moops]

Here is the situation.

Owe 170K on a home that would appraise for ~280K..

We have been looking to move, don't want to do a contingent sale, we are pre-approved for a ~400K mortgage non-contingent. We do not quite have the cash for a 20% down payment unless we sold our house first (something we do not want to do for we are being pretty damn pikcy as to what house we buy next).

So - good idea? bad idea? Looking at taking a home equity loan to use to purchase new home. Am even considering keeping current home and renting it out. Not looking to make any money off it - we ould rent it for $400 more than our mortgage, but would set that money aside for repairs and landlord bull ####.

So option is to take 40K out in equity, use that along with cash on hand, to make 20% down payment on a ~350K house.

Explain like I am shuke what some other options might be if these are terrible ideas

 

[Ron Swanson]

Terrible idea to have a rental property you don't plan to make money on. Either plan to make money on it or don't have it.

Before taking the 40k equity loan make sure it won't un-qualify you for the mortgage by throwing off your debt to income ratio.

 

[the moops]

Terrible idea to have a rental property you don't plan to make money on. Either plan to make money on it or don't have it.

Before taking the 40k equity loan make sure it won't un-qualify you for the mortgage by throwing off your debt to income ratio.

Well I would "make" money off it. Just not depending on it. Idea would be to keep it until it is paid off then sell it. I am not sold to this idea though.

And yea, good point about the un-qualifying

 

[pantherclub]

Terrible idea to have a rental property you don't plan to make money on. Either plan to make money on it or don't have it.

Before taking the 40k equity loan make sure it won't un-qualify you for the mortgage by throwing off your debt to income ratio.

this is all wrong for the short term.   i will explain once i get to my computer 

 

[Ron Swanson]

Bridge loan or equity loan is the answer if it won't throw off your borrowing ratio.  Or sell the other home 1st. If you really want to be a landlord go spend some time at the Bigger Pockets forums and go into it with open eyes. Casual landlords aren't good for themselves, their renters, or other landlords.  Until the other landlords relieve them of their underperforming asset at a bargain price.

I'll step off my soapbox now...

 

[the moops]

I have been a landlord before and was a property manager for two rental places in the past.

Already have interested families willing to rent. We are next door to an immersion school and families flock to the neighborhood to send their kids there.

 

[Bull Dozier]

I have been a landlord before and was a property manager for two rental places in the past.

Already have interested families willing to rent. We are next door to an immersion school and families flock to the neighborhood to send their kids there.

That gives you a little leg up.  I will tell you we rented our first house out after buying our second.  We also we approved for the new house purchase price while keeping the first house. We rented our first house out to a friend for six or so years.  We weren't in it to make money, it was the only way we could get out of the neighborhood as wel couldn't sell the house.  Six years later we eventually could afford to take it in the shorts.  I would never advise anyone to get into that situation, but your situation is obviously a little different and you have more experience.  My sphincter just clenched when I read your post, so I couldn't help but make a "con" post.

 

[Mrs. Rannous]

Have you talked to a realtor yet?  You might be able to sell for cash and set the close date so that you can use that money on a new home.  I guess it all depends on how hot your house market is.  A good realtor should be able to give you an idea of how fast your home would sell.

 

[James Daulton]

As long as the extra $40k in debt doesn't screw up your ratios and lower the amount of new money you can borrow, it's a fine idea.

 

[Borden]

I would recommend selling first. Between taking the 40k and then not putting the 100k down on the new mortgage you’re adding 140,000 of extra debt. Just on what that 100k would do over a 30 year mortgage at 4% it ends up being an extra $72,000 of interest that you pay. Plus, however much that home equity loan rate. 

If you decide to keep the place don’t forget that you’ll need different insurance and probably have a different taxes too pay as well when the house switches for personal to rental/income. Then there’s all the stuff with being a landlord that you’re already aware of. The worst case scenario would be that you have to move into a rental for a bit. A lot of the time you can negotiate pretty flexible moving in dates and financing dates though. If you plan it right you probably won’t have to worry about renting a place.

 

[Buckna]

I would recommend selling first. Between taking the 40k and then not putting the 100k down on the new mortgage you’re adding 140,000 of extra debt. Just on what that 100k would do over a 30 year mortgage at 4% it ends up being an extra $72,000 of interest that you pay. Plus, however much that home equity loan rate. 

If you decide to keep the place don’t forget that you’ll need different insurance and probably have a different taxes too pay as well when the house switches for personal to rental/income. Then there’s all the stuff with being a landlord that you’re already aware of. The worst case scenario would be that you have to move into a rental for a bit. A lot of the time you can negotiate pretty flexible moving in dates and financing dates though. If you plan it right you probably won’t have to worry about renting a place.

Nothing wrong with being conservative not taking on the extra debt but sounds like the OP is an experienced property manager. If he's cash flow positive by $400 a month with his renter paying down his current mortgage an estimated 2.5% per year his net gain covers the additional interest expense on the 140K in debt. That's a very simplified way to look at it not factoring in expenses for covering upkeep/maintenance, but also not factoring in potential appreciation in the property. The insurance cost will be pretty location and property specific but he can quote that out ahead of time, sometimes it's more expensive, sometimes its less... but its also tax deductible as an expense. He'd also want to take into account his current financial situation as well to make sure he can afford the additional debt service on the HEL as well as have a reserve cash amount for potential repairs and for month's of non-occupancy.

Someone mentioned Bigger Pockets forums, that's a great place to start and read up on the topic more to learn about what you would be getting yourself into. One thing I would tell the OP as well is to consider not just a HEL but also a HELOC, depending on his situation, one may be a better option than the other. Would also want to talk to a couple of different lenders, the traditional big box lenders are going to be more conservative and might be more restrictive on what they are willing to lend for the new mortgage plus any HEL or HELOC and keeping the first property. There are tons of lenders that specialize in loans for rentals and investment properties that may be more flexible or offer better terms.

 

[joker]

Somewhat similar situation as the OP - buying a house just down the street from our current one and trying to decide whether or not to sell the old one and pay down the loan on the new one, or rent out the old one and put the extra money aside made from renting, eventually selling the old one when it's paid off or there's more equity in it than there is now. The main difference is that the new house has already been picked, and we'll be closing on the new house before the old one is sold.

We've got about $50k in equity on the old one, and houses around here are selling within 2-3 days, usually for at least $5-10k minimum over asking. At first I was thinking of just renting out the old house (we rented it for about 5 years once previously and had no major issues), but I've changed my tune and am now leaning towards just selling it and applying the profit towards the new house (maybe spend $5-10k of the profit towards upgrades on the new one). Any strong views towards one or the other? What things am I not considering (taxes, etc.)?