If you are looking for money for your next purchase, you may need to look no further than your own portfolio. If you have accumulated a few rental properties or own some properties free and clear, you may be sitting on equity that you didn’t know you had. While guidelines on home equity lines of credit, fixed second mortgages and cash out refinances have changed, they can still be done with the right credit score and equity situation. The first step is to evaluate how much cash you need. Call a lender or mortgage broker and figure out exactly what can be done for you. Your current properties may have enough equity to fund your next purchase, but it is up to you to take advantage of them.
If you have equity, you have options. Most local banks will not do any type of second mortgage or even a home equity line of credit as a first mortgage on an investment property. You need to call around and talk to as many different lenders as possible. Instead of having a half dozen companies pull your credit and possibly lower your score, pull your own credit before you start looking and have your number ready. Not every bank can do what you want, but if you look hard enough, you should be able to eventually find one that is willing to work with you.
There is a big difference between a home equity line of credit (HELOC), a fixed second mortgage and a cash out refinance. A HELOC is a variable rate mortgage based on the current prime rate. With this loan, there is a 10 year repayment with an interest only payment option followed by principal and interest payments for the remaining 10 years. You only pay based on what you take out and not the entire line amount. So, you can have a line for $100,000, but if you only use $30,000, you only pay back on that amount. This is good for short term situations where you want the access to money but can pay it off quickly.
A fixed second mortgage sits behind the first mortgage but offers a fixed rate and payment. You pay on the full amount of the loan with set payments for the term of your choosing. You receive the entire amount of your cash out at closing. This is a good option if you want the comfort of knowing what your payments will be for the next 10-20 years. Even if you don’t use the full amount of cash you receive for business purposes, you still pay on that amount every month.
The final option is to take a cash out refinance loan. This works whether you have an existing mortgage or own the property free and clear. Most investment refinances are capped out at 70% of the property value, especially if you are taking cash out. You can take any mortgage product that your lender offers with the most common one being the 30-year fixed. The downside with this is that you now have a note on the property for 30 years. The advantage is that with rates still low, you can find a fix rate and monthly payment option that is very attractive.
Before you look for outside financing, take a look at what is in your portfolio first. Lending programs change all the time. If you were told you couldn’t do something last year, there may be a program currently available.