Refinance or home equity loan?

Question

I bought a "fixer upper" house 2-1/2 years ago for $60,000. I put $20,000 into it using various credit cards with 0% intro rates that are or about to run out. Meaning I will be paying a lot of interest if I dont do something in the next few months. The house now appraises at $145,000 so thats a potential profit of $65,000 that I can make. Plus I wont have to pay any capital gains on my profit because it was my primary residence for 2+ years. I am also on a 5/1 ARM loan because of the fact that I did not plan on living in this area that long.

I wouldnt mind staying in the house but I want to buy another property to rent out but dont have any additional funds to do so. Do you think it is better to sell of this house and pay off the debts and start with a clean slate? Refinance and pay off the credit cards and make a down payment on a rental house? or get a line of credit to pay off credit cards and make a down payment on a rental house?

Answer 1

The question to ask is "Do you think you've maxed out on your profit from this property?" If you hold on to it you could rent it out and make it an income producer for you. If the rents far outweigh the mortgage payment, I'd refinance and payoff the debts. You'll most likely be able to lock in at a rate down around 6-6.5%. A line of credit or other second mortgage would be at a much higher interest rate.

People who make money in this game don't do it one property at a time. They hold onto multiple properties and sell when they feel they can get the max profit, making money from rents all the while.

Best of luck!

Answer 2

You need to live somewhere, so staying in the house is probably the best bet. As far as refinancing or a Home Equity Loan, that depends on a few other factors. If your current mortgage is at a higher rate, it may be wise to refinance and take some cash out. If your current mortgage is at a really low rate, just take out a Home Equity Loan (HEL). As far as the safety of a HEL, that depends on what you mean. You are taking out the equity in your home, so if you don't pay this bill, your home is on the line. If you are concerned about the rates, a HEL will have a fixed rate, so there is no worry of it increasing. A Home Equity Line Of Credit (HELOC) on the other hand will adjust any time the Fed's change the rates. I think they have been raise a lot over the last few years, so the rising should slow down or stop at this point. Of course if your credit is too bad to qualify for any loan, you should probably sell, take the money and pay off ALL your debt, rent for 6-12 months, allow your credit to rise and then buy again at better rates. Peace, Greg S.

Answer 3

It is completely a function of interest rates (combined) and your credit.

The credit cared debt is going to be a zit on your nose. The MB sees you as LERVERAGED and that is NOT good unless you have several properties and proven yourself.

LOC is generally EXPENSIVE interest wise and rates are pretty low right now for a re-fi.

I would suggest that you refi and pay off the credit card debt through escrow; this will give you some credibility with the MB. Refi ONLY for the amount necessary to clear the CC debt. Live in the place until the market stabilizes and you get an up-tick in apraised value; it is falling now.

Build your credit and wait until the market dumps; too many people bought houses with creative financing and there are going to be BARGINS!

When that happens get a second on your place and buy a 4-unit place to rent. Rental houses are FULL OF RISK!

Talk to a CPA that specializes in Real Estate and adjust your deductutions accordingly for increased cash flow.

DO NOT get carried away with your new wealth because is just is NOT real until excrow closes and the check is in the bank.

It is NOT EASY MONEY as it may seem and use your credit cards ONLY to the extent that you can pay IN FULL each month (18% interest will eat any profits in a heartbeat).

I built 3K to just under $1M in 10 years and LOST it ALL in 90 days. I lived in a 5,000 sf home near the ocean and bought two new BMW's on the same day (my wife was VERY appreciative ;-)). I ONLY worked with finance presidents because my deals scared the S*** out of the regular loan officer and I was in one bank or another 3 days a week covering a ballon payment or buying something new.

Also get your real estate license because it will save you the commissions. Hire a professional property manager to collect and do repairs (you can get shot at collecting rents). Treat your properties as stock with ZERO emotional attachment.

My answer is probably TMI but I just don't want to see you go through the HELL! Be carefull and don't get wrapped up in the "MAGIC MONEY". It cost me a good marriage and almost 15 years to pay off the debt.

J

Answer 4

Good question. As a loan officer, I would look at a couple of things in your situation. One, you are currently on an adjustable rate that will expire in just over two years. Two, if you take out an equity line to pay off the cards and make a down payment on the rental property, most likely you will be on an adjustable rate with that as well. In the next two years or so, you could have two loans on one property that are adjusting and going up on a steady basis. If you decide to sell your current property, you could be waiting anywhere from 90 to 180 days for your house to sell (depending on what your real estate market is doing where you are). This will put a hold on your desires to purchase a rental property soon. Interest rates are still very attractive. Given what your house would appraise for and what you are wanting to draw out of your equity, you could have a relatively low loan-to-value ratio (which is good for a cash out refinance) thus getting an attractive interest rate...that is FIXED and protected from a volatile market. I would go with the refinance. Hope this helps.

Answer 5

Do the pros and cons on a piece of paper (or 2 sheets of paper) :)

145,000 @ 80 percent = 116,000 @ 6.250 rate 30 yr = 714.21 payment. You can take that interest off on taxes (where as on the credit cards you can't), plus you are saving money on paying off the credit cards that will be having high interest rates.

With the loan amout being paid off + credit cards = 80,000
116,000 - 80,000 (less your closing costs) of will give you cash in hand of approx 32,000 That is with 4,000 in closing costs (if it is that high, ok) Is that durable for you to put 32,000 down on a rental property? And it is leaving you 20 percent equity into your present home. Which I think is very smart to do. You will always have that cusion for a HELOC down the road. You could get a heloc, where you payment is based on the amount you use at the time (you do not want the one where you take the whole money out), just have it where your payments are based on what you use at the time. It can be a Line of Credit, and use a checks to take draws out of it, when needed). But I am all for you leaving some equity into your home.

Answer 6

Assuming that your current mortgage doesn't have a prepayment penalty. Refinance the current home, get cash out to pay off credit cards and down payment for new home. Make sure rent will cover PITI on new mortgage. You don't want negative cash flow on rental while paying mortgage on new home.

Answer 7

sell the house and then look for that other property. You made your profit on the 1st property. Lock it in and move on.

Answer 8

just refi and pay off CC debts ..