2nd Mortgage?

Archived From: Finance
  • Page :
  • 1
  • Text Only
Voting History
rated:
Looking for some advice here. First off, I am 25 and work in commission sales in a volatile position (IE: One month you're untouchable the next month your fired). However, I have kept my current job for just under two years and the future looks pretty good with the current company. I will also be making just under 130k this year.
​I currently have about $45k in debt between my wife and I. This does not include my mortgage which is 226k. I have a property that I inherited that is valued at $250k. This is a duplex that is currently rented out. For certain reasons I am not interested in selling it for the foreseeable future. However, I am thinking about taking a 2nd mortgage out in order to pay off debt, refinance my main house, renovate the duplex and pocket about 100k in the bank. I have certain options for this but have so many questions about Tax issues and if this is even a smart idea to do in the first place. If I take a 20 year mortgage my renters will cover the mortgage but I will ve taking on 200k of debt to pay off 45k. What are some peoples thoughts on this? I appreciate all advice.       

Member Summary
Most Recent Posts
Sounds good.  But when you take a HELOC it is a line of credit .. you draw as much as you need.  So if you need $70K .. ... (more)

prozario (Aug. 12, 2016 @ 2:42p) |

That plan seems pretty good OP. If your refi on your primary property things will go much smoother for you if the bank ... (more)

fourchar (Aug. 13, 2016 @ 6:36p) |

yeah, fraud always works out great until you get caught.

solarUS (Aug. 14, 2016 @ 10:25a) |

Staff Summary
  • Also categorized in:
Thanks for visiting FatWallet.com. Join for free to remove this ad.

bchapmanjr said:   Looking for some advice here. First off, I am 25 and work in commission sales in a volatile position (IE: One month you're untouchable the next month your fired). However, I have kept my current job for just under two years and the future looks pretty good with the current company. I will also be making just under 130k this year.
​I currently have about $45k in debt between my wife and I. This does not include my mortgage which is 226k. I have a property that I inherited that is valued at $250k. This is a duplex that is currently rented out. For certain reasons I am not interested in selling it for the foreseeable future. However, I am thinking about taking a 2nd mortgage out in order to pay off debt, refinance my main house, renovate the duplex and pocket about 100k in the bank. I have certain options for this but have so many questions about Tax issues and if this is even a smart idea to do in the first place. If I take a 20 year mortgage my renters will cover the mortgage but I will ve taking on 200k of debt to pay off 45k. What are some peoples thoughts on this? I appreciate all advice.       
 

  Do you own the inherited property free and clear? In effect, you want to cash out refi the investment property (inherited) and use the cash to pay off the 45k debt and renovate the rental property, correct?

Where does "refinance my main house" come from? Do you have enough equity in that and is that the one you are proposing to refi? What do you plan to do with the 100k cash in hand?

The property is free and clear. Pretty much the break down I want to do is as follows. Take 200k and use 45k pay off all debt, use 20k to do some repairs and landscaping of the Duplex. Use 35k to refi my other property, my current balance is 227k and its been appraised recently for 260k. Just bought it a year ago but I would like to lower the principle and payment to as low as possible. The 100k left would be used for potential investments, either in the form of a business in my current field of employment which requires cash on hand. Or just to have in case of an emergency, especially with the field I am in that is very volatile.

It may not be the best deal to cash out 200K if the rental is appraised at 250K -- usually you need <= 65% LTV to get the lowest interest rates. Anything above is usually a lot more expensive -- you'll pay a higher interest rate on every borrowed dollar, not just the dollars above the 65% LTV.

Since you prefer to have money in the bank, reducing the principal and payment on your primary home below 80% LTV does not make sense, especially with record low interest rates. After you cash-out the rental, just pay down the primary to 80% LTV (if it's appraised at 260K, you only need to pay 19K, not 35K) and refinance the rest to take advantage of the current interest rates. The reason to stay below 80% LTV is to avoid PMI.

I would do 30-year fixed for both loans.

There's nothing difficult about tax -- the mortgage interest on your primary home is deductible on your personal taxes and mortgage interest on the rental is a deductible business expense (against rental income). The cash you borrow is not income, so it's not taxed (I'm guessing this was your concern).

Summary:
1. Cash-out refi investment property into a 30-yr fixed -- take out $165K (65% LTV). Make sure the lender credit is enough to cover all fees (no-cost loan).
2. Use 45K for all debt, 20K for reparis, 19K to pay down primary mortgage to 80% LTV, deposit 81K in the bank.
3. Refi primary mortgage into a 30-yr fixed to reduce interest rate and monthly payments. Make sure the lender credit is enough to cover all fees (no-cost loan).

Thank you for the replies!

Thank you scripta for the info on the income tax. That was my main concern that taking out the money against the house would count as income and I would be taxed.

My primary house I was planning on doing that US Bank Smart Refi for 20 years.

Thank you again for all of the info so far

A "second mortgage" is a second loan taken out after you already have an existing mortgage.  The lender is in a second position with respect to the collateral behind the original lender.  When you take out a loan against a property that you own free and clear, it is just a mortgage, plain and simple.  As pointed out above, terms won't be as good on an investment property.

As for your plan, unless you have an immediate and certain need for the extra 100k, it would be silly to borrow it and put it in the bank, earning little.  You might consider an equity line of credit on the property instead.  Repayment terms might not be as favorable as a conventional loan, especially if you need to run the payments out 30 years for affordability, but it would be worth considering as an option.

 

A HELOC sounds like a better idea to me. Usually a cash-out refi comes at a higher interest rate than a purchase loan. Also, a mortgage on a rental property come at a higher interest rate than an owner occupied. You might be lucky to get a cash out investment property mortgage under 4.25% right now, where you could get a HELOC near 3.75%, for example. Plus the HELOC would be cheaper in initiation fees. Check the FW HELOC threads for some decent banks. I got my interest-only 15 year HELOC recently from PENFED. After you talk to a couple lenders and get some actual rates for both a mortgage and HELOC, run some mortgage calculators to see what would cost the least to meet your goals.

Thanks again for all of the replies.

I plan on making a move within the next 3 years to own my own business in the field that I work in. That is the reason that I want the 100k added to my current savings. Since I will need to show strong financial records when I go to approach the investors and manufacturers. I figured that since the renters will cover expenses it would make sense to do, especially since I am so young. After paying off my other debts I plan on using my extra income to save much more and pay off the real estate loans faster.

But if it makes sense I am liking the idea of using the property to get a head start.

Still wanting to make sure that it is a smart idea in the long run.

HELOC might be a better option, if possible. That way you're not paying interest for $80-100k to sit in a bank account. However, you'd be able to tap into it if you were to lose your current employment or fell on hard times (I assume that's why you reference having $100k in the bank for a safety net due to volatile employment).

I was thinking of a HELOC but since I am planning on using the money for both an emergency fund and for a future potential investment into my own business I am liking the idea of having it on hand in an account. But again, it does seem like a but of a redundancy to take the money out on a loan and pay interest just to pay it back and possibly not use it for a while.

bchapmanjr said:   
Since I will need to show strong financial records when I go to approach the investors and manufacturers.

After paying off my other debts I plan on using my extra income to save much more and pay off the real estate loans faster.


So 2 things.  First when people are looking at your financial records having 100k that you borrowed on a house you inherited is not usually going to impress them.  They don't just look at cash but usually the entire credit situation. Businesses that are started on cash from inheritance have a VERY high failure rate (pretty much the absolute highest actually) and investors know this and rarely have any interest in investing in those businesses at the start.  Plenty of snake oil salesmen looking to take the cash from you though in creative ways.

2nd, if the debt you have is 100% student loans or something this might work out.  But if that 45k debt is in CCs... well that indicates you've had a problem budgeting yourself to spending within your means.  Having 100k in the bank is unlikely to suddenly make you start doing that, even with extra rental income coming in.  What's much more likely is you end up in a position where by the time you are 30 you are back to having no cash on hand, but instead have another 40k in CC debt again.

If you want to go into business for yourself here is some advice from someone that also run their own business at your age.  Don't borrow 100k cash on an income producing assets so you can have that to pay your bills, that will run out faster then you think.  Instead get your personal expenses to a point where they can pretty much be entirely covered by the passive rental income you now have.  So your worse case is your net worth stays level instead of rising.  THAT is what will impress investors/manufacturers, a business owner that doesn't need a salary from their business indefinitely and is sacrificing to make it happen.  Not someone with 100k in the bank from inheritance.


Borrowing against assets just to stick the cash in the bank while paying interest on the loan is pretty much never a good idea.  The discipline needed to use the money properly is high and something that usually is developed over time.

fourchar said:   
bchapmanjr said:   
Since I will need to show strong financial records when I go to approach the investors and manufacturers.

After paying off my other debts I plan on using my extra income to save much more and pay off the real estate loans faster.


So 2 things.  First when people are looking at your financial records having 100k that you borrowed on a house you inherited is not usually going to impress them.  They don't just look at cash but usually the entire credit situation.
...
THAT is what will impress investors/manufacturers, a business owner that doesn't need a salary from their business indefinitely and is sacrificing to make it happen.  Not someone with 100k in the bank from inheritance.
 

who said anything about impressing investors?? 

OP - it may not be easy to get a HELOC on an investment property in your situation. and i would not expect it to be less than 4.5%, probably higher. also it will not be tax deductible except against the rental income, and then only on the portion you use for the duplex repairs.

Thanks for even more replies.

The 45k in debt consist of very little credit card debt. It is 40k in two cars and a Harley and about 5k in credit card debt (currently on a 0% card which will be paid off at the end of the year when the 0% ends).

I want to fix up the property a bit since it was built in the 50's and could use some TLC. Plus since I plan on keeping it for quite some time I want to make sure it will last another 20-30 years. My other property I have PMI on since I did a low down payment when I purchased it a year ago. So I wanted to use some of the money to refinance that in order to save all of that wasted money on PMI.

As far as the 100k for a future business. The way I am talking about is slightly different than finding angle investors. You actually get the investment from the manufacturers who only look at experience and credit history. The reason I was thinking of putting the 100k in the bank now is because when the time comes to apply I want to have the 100k in the bank for a long time and now just show a lump sum added recently.

I currently have a solid savings but am reluctant to use any of it for these projects because of how unstable my career is. If anything were to happen I want to keep these 6 months of expenses on hand at all times.

Thanks again for all replies. The info so far has been a great help

Another question I have. If I made the property my main residence (since I have utilities in my name that I charge back to the tenants based on sqft.) as well as title of the property in my name. Even though I do not actually live there full time. Is that opening a whole new can of worms with the banks as far as proving a main residence and a investment property?

Depends. Normally you don't have to prove anything to anyone, and as long as you only have one primary residence, there's no issue. When you refi, the interest rate depends on whether you plan to live at the property or not. If you say it'll be your primary and move out soon after (I think 12 months is standard) and the lender finds out somehow, they could recall the loan.

bchapmanjr said:   I will also be making just under 130k this year.

You make that, but

bchapmanjr said:   I currently have about $45k in debt between my wife and I.

You have that. Something's wrong there.

bchapmanjr said:   I have a property that I inherited that is valued at $250k.

This is a special asset. It's YOURS. In the event of a divorce, if you start mortgaging it, you might just find that your wife can get her hands on half the value because you made it look like community property.

Forget the loan, and let the rental income take care of the improvements, and keep good records.

What's your wife bringing to the table? It's great that you want to do what's best for your family, but right now it's looking a little one sided.

bchapmanjr said:   wasted money on PMI.

Why the push to get rid of the PMI? If it was smart decision a year ago, what's changed?

You don't always have to refi to get rid of the PMI. Call the lender/servicer and ask.

This year I will me making 130k and I have a year of stability coming into that so it really feels like 130k. I have only saved 20% of this so far this year.

The debt comes from installment loans like two cars and a bike. I've always made about 100k but I've had months on unemployment, moving and general waste that caused me to save very little and finance these cars.

My wife is carrying my first child. I wanted her to take time off so she is not working.

Appreciate the info from everyone. I am starting to see that I was just trying to take a easy shortcut into getting some financial freedom by taking on long term debt. I'd just be pulling the wool over my eyes for a few years.

i would take a HELOC ... take as little as i need to get rid of the PMI (wouldn't it be simply paying down part of the principal without refinancing?), use for the renovation, and if make sense even pay off the car loan (if heloc is lower in rate).

the $40K or so debt is not a big issue .. as he is saying it is for two cars ... so it doesn't reflect his on-gong expense - ideally he wont be buying new cars for a while.

solarUS said:   OP - it may not be easy to get a HELOC on an investment property in your situation. and i would not expect it to be less than 4.5%, probably higher. also it will not be tax deductible except against the rental income, and then only on the portion you use for the duplex repairs.
  I didn't mean on the rental. I meant on the primary. If that means take a mortgage on the rental, pay down the primary's mortgage to gain more equity, then get a HELOC on the primary, then so be it. However, I'm sure the rate on the investment property wouldn't be the greatest. Then again, if OP only wants to pull $100k out of a $250k asset, the rate might not be so bad.

jaytrader said:   
solarUS said:   OP - it may not be easy to get a HELOC on an investment property in your situation. and i would not expect it to be less than 4.5%, probably higher. also it will not be tax deductible except against the rental income, and then only on the portion you use for the duplex repairs.
  I didn't mean on the rental. I meant on the primary. If that means take a mortgage on the rental, pay down the primary's mortgage to gain more equity, then get a HELOC on the primary, then so be it.
 

whaaaa?? where is the logic in THAT?

solarUS said:   
jaytrader said:   
solarUS said:   OP - it may not be easy to get a HELOC on an investment property in your situation. and i would not expect it to be less than 4.5%, probably higher. also it will not be tax deductible except against the rental income, and then only on the portion you use for the duplex repairs.
  I didn't mean on the rental. I meant on the primary. If that means take a mortgage on the rental, pay down the primary's mortgage to gain more equity, then get a HELOC on the primary, then so be it.

whaaaa?? where is the logic in THAT?

  What's the difference, providing you can get a no closing cost cash out refi on the investment property and a no cost HELOC on the primary? Sets you up, IMO, for the future. Rental income pays investment prop mortgage, HELOC is available for other reasons. I just am not into attaching debt to an asset where the debt isn't used for that asset. Keeps things cleaner when you've scaled out...

jaytrader said:   
solarUS said:   
jaytrader said:   
solarUS said:   OP - it may not be easy to get a HELOC on an investment property in your situation. and i would not expect it to be less than 4.5%, probably higher. also it will not be tax deductible except against the rental income, and then only on the portion you use for the duplex repairs.
  I didn't mean on the rental. I meant on the primary. If that means take a mortgage on the rental, pay down the primary's mortgage to gain more equity, then get a HELOC on the primary, then so be it.

whaaaa?? where is the logic in THAT?

  What's the difference, providing you can get a no closing cost cash out refi on the investment property and a no cost HELOC on the primary? Sets you up, IMO, for the future. Rental income pays investment prop mortgage, HELOC is available for other reasons. I just am not into attaching debt to an asset where the debt isn't used for that asset. Keeps things cleaner when you've scaled out...

1) NO. if the funds you pull out of the investment property are not used to acquire or improve the investment property, then the interest isn't deductible against the rental income.
2) the rental mortgage wouldnt be a refi. refis aren't that hard to find. you're looking for a new 1st mortgage on a rental, with cash out. these are VERY hard to find, and i'll bet it'll be @ 5.5-6%.
3) in OP's situation and with rates this low, paying down a low-fixed-rate primary res mortgage to acquire a variable rate HELOC is dumb.
4) if OP uses a primary-res HELOC to make repairs to the rental, then the interest is only tax-deductible on sch E (ie. limited by rental income, versus Sch A which is not)

OP's best bet, if he can get it, is to get a [nonconforming] HELOC against the rental. use it to make repairs. pay off loans if you want, but leave the rest alone until you really need it. that way you aren't paying interest on money that you arent using.

[q=solarUS;19592705 said: ]but leave the rest alone until you really need it. that way you aren't paying interest on money that you arent using.
  That was my original point, a few posts up. Makes no sense to season the funds in OP's scenario unless there is a legitimate requirement by the investing partners/opportunity.

jaytrader said:   
solarUS said:   but leave the rest alone until you really need it. that way you aren't paying interest on money that you arent using.
 That was my original point, a few posts up. Makes no sense to season the funds in OP's scenario unless there is a legitimate requirement by the investing partners/opportunity.

fine. but then you gave rather poor advice, which is what I was referring to. 

solarUS said:   
jaytrader said:   
solarUS said:   but leave the rest alone until you really need it. that way you aren't paying interest on money that you arent using.
 That was my original point, a few posts up. Makes no sense to season the funds in OP's scenario unless there is a legitimate requirement by the investing partners/opportunity.

fine. but then you gave rather poor advice, which is what I was referring to. 

  My only advice was to go with a HELOC. The other part of my idea was not advice, it was simply clarifying what I was thinking when I wrote my post. Regardless, the ONLY advice I intended to give was to use a HELOC rather than let $100k sit in the bank for no reason, while paying interest on it.

So after taking all of the replies and information into a consideration I think I have a new plan here.

Currently I have two properties. Both being rented while I rent my current residence since work caused me to relocated in order to stay with my current employer.

Property 1 is the inherited one that is free and clear. Property 2 was my main residence. I have both properties rented for $1500 a month for a gross income of $3000 a month. Property 2 has a 1500 mortgage on it with PMI so I just barely break even (small loss monthly after all expenses taken into account).

So now I am thinking of doing a 70K HELOC through US bank. Using 45k to pay off my installment loans and another 25k to refi property 2 and reduce my monthly payment and eliminate the PMI to have some net income from that property as well.

So with this plan I will consolidate the debt, increase some passive income and I will use my income to save the 100k+ that I would need.

Thoughts on this plan?

wtf? in the last 6 days you and your wife were relocated and you rented your primary residence out??? and now you wanna renovate the old primary res instead of the duplex??

solarUS said:   wtf? in the last 6 days you and your wife were relocated and you rented your primary residence out??? and now you wanna renovate the old primary res instead of the duplex??
 

I think that info was just omitted in the OP. Don't be so jumpy.

jaytrader said:   
solarUS said:   wtf? in the last 6 days you and your wife were relocated and you rented your primary residence out??? and now you wanna renovate the old primary res instead of the duplex??
I think that info was just omitted in the OP.
 

why would you think that? it was never alluded to or otherwise suggested in any way. 

Sorry let me clarify. It was omitted in the OP. I didn't think the thread would get so much traction so I left that part out. I relocated 3 months ago which is what got me thinking down this path.

I do not want to reno the old primary residence. I am thinking about refinancing it in order to lower my monthly payment by eliminating pmi and paying down some principle (maybe not a full refi but at least pay off the principle down to 80% LTV).

Sorry for any confussion.

bchapmanjr said:   So after taking all of the replies and information into a consideration I think I have a new plan here.

Currently I have two properties. Both being rented while I rent my current residence since work caused me to relocated in order to stay with my current employer.

Property 1 is the inherited one that is free and clear. Property 2 was my main residence. I have both properties rented for $1500 a month for a gross income of $3000 a month. Property 2 has a 1500 mortgage on it with PMI so I just barely break even (small loss monthly after all expenses taken into account).

So now I am thinking of doing a 70K HELOC through US bank. Using 45k to pay off my installment loans and another 25k to refi property 2 and reduce my monthly payment and eliminate the PMI to have some net income from that property as well.

So with this plan I will consolidate the debt, increase some passive income and I will use my income to save the 100k+ that I would need.

Thoughts on this plan?


 Sounds good.  But when you take a HELOC it is a line of credit .. you draw as much as you need.  So if you need $70K .. best heloc is far more like say $100K or max you can get.  That apperently helps with credit score - as you are not max utilizing the credit line.  Plus you'll have extra emergency access - in case you need more money for whatever.

That plan seems pretty good OP. If your refi on your primary property things will go much smoother for you if the bank believes that house is either your primary residence or your 2nd home instead of now a "rental".

fourchar said:   That plan seems pretty good OP. If your refi on your primary property things will go much smoother for you if the bank believes that house is either your primary residence or your 2nd home instead of now a "rental".
  yeah, fraud always works out great until you get caught.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017