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Old 02-25-2014, 07:39 PM
 
5 posts, read 19,981 times
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I bought a home as my primary residence for 235,000 in May 2012. Currently the home is worth about 285,000 and have 220,000 on the mortgage which is FHA. We are moving to a new home as our primary residence and were initially planning on selling the old home for a down payment on the new home. I am considering keeping the old home and renting it out, and taking out a second mortgage on the old home for the down payment on the new home. Can I do this or is there something I'm missing?
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Old 02-25-2014, 08:07 PM
 
19,674 posts, read 21,747,198 times
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You can do it if the bank will loan and if they do but can your wallet handle it? Remember you may not always have a tenant in the property paying the mortgage. Lots of risk you're planning on taking on
Rental
1st mortgage
2nd mortgage
New house
1st mortgage

That's three mortgages. Personally I think it's very irresponsible
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Old 02-25-2014, 09:55 PM
 
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Wanted to add but couldn't edit. It's risky but it's all related to your income. Leveraging to this extent is dangerous
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Old 02-26-2014, 08:56 AM
 
Location: MID ATLANTIC
7,846 posts, read 19,168,390 times
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City/State, City/state.....

As a rule, most lenders require you to have anywhere from 25% to 30% equity in the current home to count rental income to offset the mortgage payment(s). So, if the equity is not there, your income would have to carry all of the mortgages, old and new, without the benefit of rental income. The reason I have noted "City/State" and there are Sticky Announcements on the forum, pockets of portfolio money exist, where if you put down 20% on the new property, the rent on the first home will be counted without regard to equity.

I won't be critiquing your plans without knowing the complete situation, for all I know, you are a trust fund baby or have money in an offshore account somewhere. I can say, my observations show most of the trouble has already occurred in our industry; those considering new debt are conservative with strong scores, or the polar opposite, no home, trying to re-establish and rebuild. The middle ground appears to be gone.
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Old 02-26-2014, 09:03 AM
 
Location: Southern California
4,450 posts, read 5,494,838 times
Reputation: 2210
Quote:
Originally Posted by Bsebllsnwbrdng1 View Post
I bought a home as my primary residence for 235,000 in May 2012. Currently the home is worth about 285,000 and have 220,000 on the mortgage which is FHA. We are moving to a new home as our primary residence and were initially planning on selling the old home for a down payment on the new home. I am considering keeping the old home and renting it out, and taking out a second mortgage on the old home for the down payment on the new home. Can I do this or is there something I'm missing?
I'm not here to judge. Yes it is possible, but there are so many sides. Some feel leverage is good, other feel that it is bad. You are doing what so many others did and lost multiple homes.

Why did the value go up from 235 to 285, did you get a deal, did you put money into it, did it just rise due to inflation? Why are you moving and buying another home? Can you afford both homes without any renters? Is it easy to rent out your old unit? Do you have 10k when the renters pet destroys your house? Do you like gambling? It is just a numbers game where most people grossly underestimate the expense numbers. Leverage is good for appreciating markets, but with rates being so low, your leveraged money can disappear in a second with a statement from the feds saying rates will increase.

Can you do it, I've done it, but I know how to do math and don't speculate about appreciation.

If your new loan is smaller than $220k then you made money, if it is larger, then you are moving backwards and gave away all of your profits, putting the casino's money back on the table for a larger house. Granted I don't know the complete story, but you could buy a larger home, put more money down and have a lower mortgage payment and not have mortgage insurance, which would be a good thing.

If you want to hold onto your old house, I'd consider doing a new conventional 1st with no mortgage insurance and no fees added to the loan and get rid of place before you have to pay any capital gains tax. When the capital gains kicks in, you'll have to make another $15k just to offset those gains, instead of selling today at 285, you'd have to sell at $300 to net the same. Do you think the value is going to go from 285 to over $300 in the next 3 years and you will always have a tenant what is not going to cost you a dime?

How long do you plan to keep your new home? When it goes up in value, are you going to sell it and buy into a larger one, does it ever end?
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Old 02-26-2014, 09:13 AM
 
Location: Austin
7,205 posts, read 18,269,077 times
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I don't see how you'll be able to get much money from the current house if you refi it. In order to take cash out, you'll still have to leave 20-30% depending on the bank/lender, and depending on your credit and situation. At $285k, if they allow the minimum of 20%, that's only $8k you have to play with, but you also have closing costs when you refinance, so that would probably leave you with less than $5k to play with. Are you that hard up for $5k to make a downpayment on the new house? If so, you can't afford it. Just my math.
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Old 02-26-2014, 09:16 AM
 
Location: Southern California
4,450 posts, read 5,494,838 times
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Default example

Here is an example of under estimating expenses. Imaging you receive rent of $1200, but all of your mortgage, property taxes, HOA and insurance is $1500, you might think that it only cost you $300 a month, but in reality you're going to also have to pay income taxes on income of around $3000, costing you maybe another $1000 a year. Just because you are losing money every month, doesn't mean it will help you on your taxes, it is still possible to have to pay taxes too.
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Old 02-26-2014, 12:02 PM
 
5 posts, read 19,981 times
Reputation: 11
Quote:
Originally Posted by thelopez2 View Post
I'm not here to judge. Yes it is possible, but there are so many sides. Some feel leverage is good, other feel that it is bad. You are doing what so many others did and lost multiple homes.

Why did the value go up from 235 to 285, did you get a deal, did you put money into it, did it just rise due to inflation? Why are you moving and buying another home? Can you afford both homes without any renters? Is it easy to rent out your old unit? Do you have 10k when the renters pet destroys your house? Do you like gambling? It is just a numbers game where most people grossly underestimate the expense numbers. Leverage is good for appreciating markets, but with rates being so low, your leveraged money can disappear in a second with a statement from the feds saying rates will increase.

Can you do it, I've done it, but I know how to do math and don't speculate about appreciation.

If your new loan is smaller than $220k then you made money, if it is larger, then you are moving backwards and gave away all of your profits, putting the casino's money back on the table for a larger house. Granted I don't know the complete story, but you could buy a larger home, put more money down and have a lower mortgage payment and not have mortgage insurance, which would be a good thing.

If you want to hold onto your old house, I'd consider doing a new conventional 1st with no mortgage insurance and no fees added to the loan and get rid of place before you have to pay any capital gains tax. When the capital gains kicks in, you'll have to make another $15k just to offset those gains, instead of selling today at 285, you'd have to sell at $300 to net the same. Do you think the value is going to go from 285 to over $300 in the next 3 years and you will always have a tenant what is not going to cost you a dime?

How long do you plan to keep your new home? When it goes up in value, are you going to sell it and buy into a larger one, does it ever end?
The value of the home went up purely due to home prices rising overall in the area, and we put some money into it. We are moving to get in something a bit bigger as we are going to start having children somewhat soon. I do not believe that we would be able to afford both homes without a renter. I make decent money, about 100K per year (70K take home). I am also paying about $1000 per month on student loans which is my biggest concern. For the most part we do not have any money to put down (maybe very little, 3K - 5K) and were planning on using the sale of the old home for the down payment. But if I do not sell the home and keep it as a rental I would need to take out a second mortgage on the rental home to use as a down payment on the new home, or else find some other way to get the down payment on the new home. I would need about 20 - 30K to put down on the new home. Then after I move into the new home, I would be looking at: Rental home - 1500per month first mortgage, 300 per month second mortgage and I think that I could rent it out for around 1700 per month, so the rent might barely cover the mortgages. Then looking at 2300 per month mortgage on the new home. I am really thinking that this would be taking on too much risk. But I figure that if I could make it work in the beginning then later on it would really be worth it.
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Old 02-26-2014, 01:30 PM
 
Location: Southern California
4,450 posts, read 5,494,838 times
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A few things not in any specific order.

I don't think you'll have enough cash and equity to pull out a 2nd and keep the property as a rental, you also need reserves.

If you only have 8K in cash, that is your risk. You've owned a home for 2 years saving about $350 a month, but you are thinking about taking your mortgage up $700 a month. Unless you got a raise, paid off some bills, and increased your cash flow, a $2300 mortgage is out of your budget despite probably being able to qualify for it with your ratios.

With the increase in property value, you should be looking at refinancing to get out of FHA and mortgage insurance, the way I see it, you are probably paying over $200 a month more, than conventional, but I don't know your whole story.

Can it work, possibly, but not anytime soon due to equity and cash requirements.

Something else you can do is: sell, don't put so much down on your new primary residences, then use a big downpayment on a rental unit or duplex. I'd avoid FHA, unless you had to.

Downsize to an apartment, rent out your house and see if you can be a landlord. At least your rent will be much less than a mortgage payment, plus you'll be able to save for a downpayment.

Are you itching to buy because you think prices are going to run away next year?
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Old 02-26-2014, 04:02 PM
 
5 posts, read 19,981 times
Reputation: 11
Quote:
Originally Posted by thelopez2 View Post
If you only have 8K in cash, that is your risk. You've owned a home for 2 years saving about $350 a month, but you are thinking about taking your mortgage up $700 a month. Unless you got a raise, paid off some bills, and increased your cash flow, a $2300 mortgage is out of your budget despite probably being able to qualify for it with your ratios.
Over those two years it is not that we were only ABLE to save $350 a month, but we were putting most of our disposable income to pay down my student loans. We could have saved much more had we not done that.
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