Answers · Investing
How do I pull equity out of one property to buy the next?
There are three main ways: a cash-out refinance, a line of credit, or a second mortgage. A cash-out refinance replaces your current loan with a larger one. A line of credit or a second leaves your first mortgage alone. The right one depends on the loan you have now, how fast you need the money, and what the next deal earns.
Written by Andrew Malm, Senior Loan Originator, NMLS# 2663426. Last reviewed .
If your current mortgage has terms you would never see again, replacing it to reach the equity can be expensive. A line of credit or a second mortgage sits behind it and leaves it untouched. If your current loan is nothing special, one new loan can be simpler.
On a rental, the lender looks at the rent, your credit, and how long you have owned the property. Most want some time to pass after a purchase before they will lend on a new, higher value. That waiting period varies by lender, and it matters if your plan is to buy, fix, rent and refinance.
On your own home, the same tools exist under a different set of rules. Using the equity in the house you live in to buy an investment is common. It also means your home is the collateral. I treat that seriously, and so should you.
The math I run is simple: what does this cash cost every month, and what will it earn where you are putting it? I have told people not to do it. If the cost of the cash is close to the return, the deal is not there yet.
What I'd do
- Know your current balance and terms before we talk. They decide which tool fits.
- Ask what the closing costs are and compare them to the cash you receive.
- If you plan to refinance after a rehab, ask about the waiting period before you buy.
- Keep reserves. Borrowing every dollar of equity leaves no room for a vacancy.
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