Profile picture for RobUre

to by 2nd home - better refi current mortgage or get separate mortgage for new home?

I own home valued at $850k now, with $90k principle left on mortgage, at rate of 3.75% with 5 yrs left on fixed term mortgage.

Looking at 2nd home (to rent out or 10 yrs, then move into after that). Price for 2nd home approx $650K.

I have $100K of cash I could invest, but would rather save and keep it invested (and save as a cushion)

Refi current home mortgage and take cash out to buy 2nd home, or get a seperate new loan for 2nd home?

Thanks for your advice!!
  • August 31 2013 - Aliso Viejo
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Answers (11)

Would you consider a cashout refinance for the down payment and at the same time create a new purchase loan?  This way you can keep your investment in place.  Please contact me via my profile if you would like to discuss.
  • September 25 2013
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Hi Rob,

Another solution if you do plan on buying with all cash is to use "delayed financing". Basically if you buy with all cash you can finance the property after it closes and take your cash out. This allows you to have a stronger offer up front.

  • September 10 2013
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Profile picture for CA Direct Lending
Charles, there is no additional tax deduction in this situation on his primary for cash out.  There is only a tax deduction on the original acquisition indebtedness plus $100k on a HELOC.
  • September 10 2013
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It is better to use the equity in your primary home to finance the second.
1. The financing terms and rates are much more favorable when you borrower against the home you live in.
2. The tax deductions are better for primary residences
3. The appraisal will be much less scrutinized if you are doijng a primary home.
4. Credit is much more lenient when working on a primary home.
5. You will get the cash you need for your purchase quicker when borrowing agains a primary residence.

You can likely refinance and get many benefits in addition to a the cash you need.. Because of home value improvement nationwide, you may be able to get access to cash to also payoff consumer debts. You will increase your tax benefits by doing so. You will get to skip a payment after closing as well. Give me a call for a free 5-10 minute consultation. - Chuck [Spam content removed by Zillow moderator due to violation of
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  • September 10 2013
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Rob,

Call me.  I am a direct lender in Los Angeles specializing in Jumbo loans.  We can do 2nd homes with a min of 20% down.  Depending on how much you currently have, we can always look into doing a refi on your home if it makes sense.  Since you only have a few years left on your mortgage you do not have to go back on a 30 yr loan, but could do a 5,10 or 15 if your intension is to pay if off as soon as possible. 

Thank you,

Kevin
  • September 01 2013
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Rob - first of all congrats on paying your home down so far and as I have been a real estate investment specialist for the past 9 years would say take the money out of your current home only as a last resort.

There is a very low chance you will get anything close to the 3.75% you currently pay and the interest cycle will be reset meaning you will pay more towards interest and less towards the principle (unlike your current situation which is reversed).

For a second home you will most likely require 25% down payment as the guidelines have gotten very strict over the past 4 years. Your income will also have to support the payment on both homes without the inclusion of the renters income.

I have a team of people that would be glad to help you get everything going in the right direction.
  • September 01 2013
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Profile picture for CA Direct Lending
The definition of a 2nd home for IRS purposes and the definition of a 2nd home for lending purposes are different. 

You could still have the tax benefits of a 2nd home while renting out the 2nd home for IRS purposes as long as you meet their definition, but the lender may want to call it an investment property.  And, as stated here by others, the terms for purchase are significantly different if it were a 2nd home.

Also, you will have no additional tax benefit on your primary by taking cash out to purchase a 2nd home.  The IRS only allows a mortgage interest deduction on acquisition indebtedness up to $1M plus $100k on a primary residence and qualified 2nd residence.  This means the tax deduction is allowed only on money used to acquire the property and not cash taken out of it. 

As Mike Politzer suggested, I agree you should have a detailed conversation with a mortgage professional to map out the most cost-effective strategy for this purchase.
  • August 31 2013
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Good morning,

Great question! You actually have several options. But honesty I think refinancing your primary residence as opposed to a new purchase loan on the investment property is the best one.

I say this because the down payment requirements and the interest rates tend to be a bit higher with investment property. Going this rout will also give you a strong advantage over any other competing buyers when offering all cash on the home you want. And in this market, especially here in Orange County you need that edge.

And if I'm not mistaken your tax benefits will be greater with your primary residence. But please consult your accountant to confirm.

If you would like to hear more I will be happy to walk you through the process and show all your options, rates and payments. I'm local, just up the road in Newport Beach, so we could meet or discuss over the phone. Please let me know if I can help.
  • August 31 2013
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Profile picture for PaulMcCausland
I doubt if an underwriter would view this as a 2nd home purchase, but rather as an investment property. The math works out sizably better if you cash out on your current home. The cash available is not 20% of the purchase price, so that could become an issue.
  • August 31 2013
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Profile picture for Mike Politzer
It's probably a good idea to have a detailed conversation with a mortgage professional as well as the previously mentioned tax professional, maybe even first, to find out how best to structure the financing you're going to need.

It sounds like you're more than likely going to be buying an investment property, rather than a 2nd/vacation home, from the financing perspective. The guidelines and pricing are significantly different for each, and with a non-owner (investment) the down payment requirements are stricter. So get a good feel for that as well which will help you figure out how best to proceed.

Cheers
  • August 31 2013
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Profile picture for shapiroamg

How about cashing out for your down payment and financing a part of the new home. If you are going to rent it out, it would be beneficial, for tax purposes, to have some debt.  If you have an accountant, I would suggest calling him/her to discuss.

You could also pull cash out of your current home with a home equity line of credit. 

You have many options which all have + and - , but that first call should be to your tax person.

  • August 31 2013
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