Equity Loans. Got some questions.

[mccannable]

I am almost ready to accept the counter offer on a short sale for an income property. To avoid huge closing cost on a small borrowed amount I am leveraging my cash and touching my 401k for a loan to buy the property. My plan is to then turn around and get an equity loan instead of a traditional mortgage.

I talked to penfed who our cars are financed through and seemed like it was no big deal. I can take out %70 of value of home. There are no closing cost and seems pretty straight forward compared to a mortgage.

any downsides? Besides slightly higher interest rates?

[smyles]

You want to get a HELOC to pay back 401K loan? Why?

[Maestro]

Because usually you can deduct the interest from his taxes where the 401K loan can not be deducted and if you change jobs it has to be repayed immediately. But tax deduction on a HELOC today only applies to the primary resident, not a income property.

Because Mortgage brokers did all kinds of bad things with HELOC and letting people use them as the down payment in addition to the mortgage the government has put lots of restrictions on them.

Really you should talk to a tax account there are benefits of doing a mortgage on an income property. Also I hope you set up an LLC to buy the property and have it managed through that than directly by you. You may need to do some more home work on this.

[Axelfuzz]

It depends on the difference in the rate and the amount you are financing. It would be silly to skip a traditional mortgage to avoid a couple of thousand dollars in cost only to get smashed with 1-2% higher in rate. The exception would be if you planned to payoff the principal balance faster than you would recoup the expenses.

Can you share some numbers on the loan amount and rate you are being offered?

[smyles]

Originally Posted by Maestro

Because usually you can deduct the interest from his taxes where the 401K loan can not be deducted and if you change jobs it has to be repayed immediately.

I know that. I'm asking why OP wants to do it.

[mccannable]

Not a credit line heloc but a fixed rate loan. It's like I'm doing a traditional mortgage but without the closing cost for a slightly higher rate. But its a low amount and only a 5'year term so I will save vs 3500 closing cost and a pain in the ass closing vs cash.

[smyles]

If it's low amount and short term, probably the easiest/cheapest is to gradually pay back 401k loan - those usually have the lowest interest rate, and you can repay sooner if needed. Besides switching jobs & having to repay it right away, other 'con' is you can deduct equity loan interest as expenses, reducing taxable rent profit. But if you end up with paper loss anyway, it's moot... So again, many factors for each of the options.

[mccannable]

Originally Posted by smyles

If it's low amount and short term, probably the easiest/cheapest is to gradually pay back 401k loan - those usually have the lowest interest rate, and you can repay sooner if needed. Besides switching jobs & having to repay it right away, other 'con' is you can deduct equity loan interest as expenses, reducing taxable rent profit. But if you end up with paper loss anyway, it's moot... So again, many factors for each of the options.

My 401k loan only allows for full payment prepayment and is
Doing quite well as far as returns so the extra 2% interest is worth it. Plus I'll pay it off sooner.

[ejheverest]

Why not save up the money you need for the property and then buy it?

[mccannable]

Originally Posted by ejheverest

Why not save up the money you need for the property and then buy it?

Id rather make money using Others money.

[Seminole]

FYI, you can only deduct the interest on the first $100k of a HELOC compared to all of the interest on a regular mortgage (well, the limit is $1M, but I doubt the property is valued that high).

Plus with mortgage rates so ridiculously low it would make more sense to just get a mortgage.

A consultation with a tax accountant will be your best bet.

[Maestro]

Check with Quicken Loans they offer 8 yrs loans now so you do not need to do a full 15 or 30 yrs. My last loan my closing costs were not 3200, if you forget the title transfer costs, and those items which you have to pay whether you pay cash or have a Mortgage, It think my came in around $1200. If someone is quoting $3200 closing cost they must be including points and other things. I just refi my place and my closing costs was $250, Since I did not have to due a title search and other things. I did not go through a broker I went directly to the Banks.

I personally would not touch the 401K money unless you investment suck wind, as it was pointed out you can not write off the interest from the 401K loan.

Again the idea here is to maximize your cash flow and tax deductions when you are looking for an investment property.

[xtac]

penfed refi is solid 5 yr 2% if your credit is excellent.
first off by doing this you will be paying interest on your own money.

look into the rental property issue/ owned occupied first mortgage

doesn't touching your 401k have its own implications tax wise.

and yes consult a professional attorney and or cpa.

[mccannable]

Originally Posted by Maestro

Check with Quicken Loans they offer 8 yrs loans now so you do not need to do a full 15 or 30 yrs. My last loan my closing costs were not 3200, if you forget the title transfer costs, and those items which you have to pay whether you pay cash or have a Mortgage, It think my came in around $1200. If someone is quoting $3200 closing cost they must be including points and other things. I just refi my place and my closing costs was $250, Since I did not have to due a title search and other things. I did not go through a broker I went directly to the Banks.

I personally would not touch the 401K money unless you investment suck wind, as it was pointed out you can not write off the interest from the 401K loan.

Again the idea here is to maximize your cash flow and tax deductions when you are looking for an investment property.

Brokers won't touch small loans only banks and they require points on that little financed. My 401k is only a little of the price. Most is cash.

[ejheverest]

Originally Posted by mccannable

Id rather make money using Others money.

I meant for the downpayment. I didn't put much down on my first rental property and it cost me in PMI each month and not having the cash flow I wanted out of the property, once I payed insurance, taxes and fees.
Monthly bills and positive cashflow were 2 things I looked at when we refi'd our other rental property. Ended up with the exact dollar amount I wanted the mortgage payment to be at.

Great time to buy any real estate now, rates are low!!

Goodluck

[mccannable]

You gotta put at least %20 down no days for investments.

[ejheverest]

NavyFed requires 5% down, with No PMI on there Mortgages. FHA is another option for people who don't have/want to put down 20%

[persian54]

Originally Posted by ejheverest

NavyFed requires 5% down, with No PMI on there Mortgages. FHA is another option for people who don't have/want to put down 20%

I've never done FHA, but isn't their pmi pretty high?

[pwrdbynel]

I work in this industry. If its a small loan amount then go to your bank and get the HELOC. If the loan amount is above 75k get a mortgage, most lenders will get you a rate in the 3s with no closing cost. The only issue with most HELOCs are the are usually interest only loans and are ARMs. If you plan to pay it off quick just go HELOC, but long term I would go mortgage. Either way get one or the other a write is a write off. One last thing, if you could pay back the 401k without a loan, that would be best because on an investment property you can write off depreciation and many other items, which could at the end save you money and you won't have to take out a loan. Anyways good luck and smart move to buy, these prices won't last forever.