Search
Close this search box.

Mar 23 2022

Strategizing Interest Rates When Purchasing with Home Equity

Home equity is a useful tool for investing in investment property. If you own your home outright, or have a strong equity position in your current home, you can leverage that equity into a rental home purchase. Purchase loans, however, typically have a lower interest rate than refinance loans. In this episode I share an example of how you can strategize your interest rate when using equity to purchase an investment property.

Refinance Home Equity

Let’s say you own a home outright that is worth $400,000 and you found another home worth $300,000 that you would like to purchase as a rental property. One option is to pull out a new mortgage on your primary home at 75% Loan-to-Value (LTV) and purchase your second property with $300,000 cash. Cash is a great option for investment property because the real estate transaction can close in days as opposed to weeks. However, perhaps the refinance of your current home comes at an interest rate of 6%, but a purchase loan on the new property comes at a rate of 5%. Loaning more money at the 5% purchase rate rather than the 6% refinance rate would generate a greater ROI in the long run. To get the best ROI, in this scenario we’re considering 75% of our home’s equity as our initial investment.

Calculating Investment Equity

Since 75% of our example home equals $300,000, then our goal is to purchase a new rental property at $300,000. Say we found a loan program that offers a home purchase investment loan at 80% LTV. 80% of $300,000 equals $240,000. That means that we need to come to the table with $60,000. Well $60,000 equals 15% of our example home in which we hold 100% equity position at $400,000. So here’s the basic math:

Primary Home: $60,000 Refinance (15%LTV) at a 6% fixed rate

Investment Home: $240,000 Purchase (80%LTV) at a 5% fixed rate

Total Investment: $300,000 Refi/Purchase investment (20/80) ~ 5.2% fixed rate

Playing with our equity sort of generated a 5.2% interest rate. Keep in mind, to buy down a 6% interest rate to 5.2% may cost 2 points, and on $300,000, that totals $6,000. Strategically using our home equity could save you a free $6,000 buy down… something to consider when getting into investment property. You can play with the numbers on how much ROI/RTV (Rent-to-Value) you want to gain, but you can see that with a little bit of effort, you can save some up-front and long-term investment money to generate more profit.

Strategizing Interest Rates when Purchasing with Home Equity

This scenario can play out whether you own 50% equity or 100% or really any equity position in your home. Whatever your situation, there’s a Juicy Solution waiting for you, and I’d love the chance to chat with you. Give me a call or shoot me an email for a free mortgage consultation to see how I can help.

DOWNLOAD | GUIDE TO HOME LOAN PROGRAM BASICS FOR MORTGAGE LENDING