HELOC? - Posted by Jamie

Posted by Smart Money on September 25, 2004 at 24:56:05:

First off…dropping PMI requires more than a 90% LTV. I think its something like 75% to 80% depending on your lender.

In general, unless a property will not cash flow, I would try to put as little in the deal as possible. That leaves you more money to buy the next one and more money to subsidize the deal in case something goes bad.

If you think about it, every additional dollar that you put in will help you avoid paying 6.5% interest (or so) and PMI. If that is the case, then all you have to do with that extra money is put it in something that yields bigger returns (such as other properties).

As an illustration, if you found a place for $100,000, and you put 10% down, you would have $14,000 tied up in the deal. Not bad. But to get to 20% down to avoid PMI, you’d have to put in another $10,000. This would save you about $65 in PMI every month, or $780 saved per year. $780 on the $10,000 extra you put in gives you a 7.8% return. But consider that if use that extra $10,000 to help to buy a place for $100,000 plus $4000 closing costs for $14,000 out of pocket, that second $100,000 rental property will go up in value about $3000 a year, and you’ll pick up another $300 a year in taxes you don’t pay through depreciation. That works out to about a 25% return on the downpayment for the second property. So, you can either make 7.8% by paying extra to get avoid PMI, or if you apply that money toward another acquisition, and throw in more money, you can make 25%. It makes more sense in terms of return on your investment to buy another property instead of using the money to overpay a downpayment to avoid PMI.

Again…all of this assumes that you can rent the place out and at least break even.


HELOC? - Posted by Jamie

Posted by Jamie on September 24, 2004 at 09:36:31:

We are in contract for our first investment property in an area that has been appreciating about $1,200 a month. We expect to generate some negative cashflow due to the rental market being soft because of low interest rates, more people buying, etc.

The question on financing is this: do we put 20% down (with prepaid interest, closing costs, etc. this would come to $32,000)and a fixed 6% interest only loan or 10% (80-10-10) with a HELOC which is currently around 7%. I understand that the nature of HELOCS is that they fluctuate alot and with interest rates predicted to go higher, is this a wise scenario?

Naturally, we would rather use as little of our own money as possible. We need to keep some for emergencies, vacancies, etc.

Would you recommend a HELOC and is the reason for the HELOC avoiding PMI? With good appreciation, wouldn’t it be wise to just pay PMI and as soon as the house has increased in value by 10% it could be removed? Any advise would be appreciated.