Advice on Purchasing a 2nd Home - Posted by Willie

Posted by Shane Milne on April 27, 2006 at 22:25:35:

Well since I don’t know much about your life’s ambitions or long term goals (just your short term ones) I can only recommend a mortgage that wouldn’t have many fees - the reason being is you only plan on holding onto your current home for a couple more years, so more fees to get a lower interest rate likely wouldn’t make any sense. That said, if your credit is good-to-excellent, you should be able to obtain a no-cost home equity loan(HEL)/line of credit (HELOC) on your current home. You can’t defer interest (on HELs or HELOCs that I know of), but with a HELOC you can just pay interest only…however it is adjustable based on the Prime rate, but the good news it that the Fed announced today it might “pause even if risks aren’t balanced” so that would be good news for people with debt tied to the Prime rate, and interest rates in general. You could refinance into a negative amortizized mortgage (defer some interest), but there are usually costs involved, and with the ones without costs typically a 3-year prepay usually applies (could prevent plans of selling in 2 years). You could probably find a negative amortized mortgage based on the COFI or COSI index about 1% lower than a HELOC though, so if your goal is truly cash flow (and not worried so much about some up front costs to get there) then an Option ARM would be a good option to consider against the HELOC.

-Shane Milne
licensed in most states

Advice on Purchasing a 2nd Home - Posted by Willie

Posted by Willie on April 27, 2006 at 10:35:25:

I am considering purchasing a 2nd home. My 1st homes value at $630,00, I owe $330,00. I have a lot of equity. The 2nd home is $630,000. I would have to get a HELOC for 20% of the downpayment for the 2nd home. What would then be the best loan for me ?? Interest only, Defereed interest ?? I will be renting out the 1st home and living in the 2nd home. The 2nd home or the 1st home I could sell in 2 years or then maybe refinace the 2nd home. Not sure what to do.

Thanks and Please advise !!!

Re: Advice on Purchasing a 2nd Home - Posted by Ed Garcia

Posted by Ed Garcia on April 28, 2006 at 10:45:00:


You don?t tell us where you?re at? I can tell you that you?ll be lucky to break even in using you current house as a rental. As a matter of fact if you?re not in California or NY, I doubt if you?ll break even, I see negative cash-flow in renting the property.

At 6% you have a $1978 payment not counting taxes, insurance, vacancy, and expenses once you make it a rental. If I viewed your house as a rental, and let?s say I got $2500 per month. I?d take the $2500 X .75% taking 25% off the top for taxes, insurance, vacancy, and expenses. Now this is a generic formula lenders use to determine cash-flow of a rental property. 75% of $2500 = $1875. My number may not be right on, but they?re just for you to get the feel on how to determine your cash-flow. With my numbers, you have $103 per month negative cash-flow and that?s if you don?t borrow the 20% down to purchase the other home.

So you?re going to have negative cash-flow and a major increase in monthly mortgage payments. May-be it?s time you consider selling the first house and bite the bullet on the tax ramifications if there are some. It most likely has increased and toped off in value, so why keep it and have a property with a lot of equity and a negative cash-flow?

If we know more about you, your income, credit, etc. we could be a little more instrumental in advising you. But with what little information you?ve provided us with, my suggestion is to sell you current house now, roll you equity into the next house and lower your debt service (mortgage payments).

If you find some deals that you want to invest in, you can later draw a HELOC against your new house because you?ll have off setting income from the new REI. If you don?t find any other deals then your mortgage payments are more manageable. When doing a HELOC, you only pay for the money when you use it.

Ed Garcia