No. of Recommendations: 4
Hi FFL,

In a year we will be moving out of our 2BR/2BA condo and are considering renting it out instead of selling.

"Will" on "may"? It's NOT a question of semantics... but a question of your truest expectation certainty and intent (because law is ALL about "intent.")

Your loan application, and closing certifications, will ask if you "intend to occupy the subject property as your primary residence." It will NOT specify HOW LONG your intentions are for (although, case law has allowed borrowers to be found guilty of fraud and/or misrepresentation when they'd converted to a rental as quickly as 6 months after financing when certified as 'intended-primary.')

If you merely SUSPECT you MAY be moving in a YEAR or so... you are likely safe enough in financing today as your primary residence, in intent and action. (And, if in doubt, consult your own attorney.)

But in evaluating the decision, is it:
1) better to TAKE OUT the equity via a refinance or home equity loan, put it in safe investments (money market and/or short term bonds) and use it to pay the negative cash flow if needed? Rather than keep the equity in the home? We do not yet know if we will be renting or buying a new place when we move.


I'll make a program recommendation to consider, below... but regarding what to DO with available funds left unused, I'd recommend actually NOT drawing out the equity now, but merely establishing an available HELOC up to the full equity level at your current principal residence terms.

2) better to take out the equity BEFORE it is converted to a rental propery

You will never be able to secure as low of rates and lenient of leverage terms on THIS home as you are able to right now while you are still, in action and intent, occupying as your principal residence.

3) better to we take out ALL the equity (even if it means a higher interest rate)

Just set up your HELOC undrawn.

4) better to refinance for as long a term as possible (i.e. 30 years) to lower monthly payments as opposed to keeping the current loan terms with 25 years left and paying principle faster?

OK... here's what you *MIGHT* consider doing (note the uncertainty due to the relatively LOW actual loan amount, versus the savings it might capture versus the unavoidable minimum transaction costs of the refinancing...)

STRATEGY;
1) Refi to a 30 FRM, and buy the interest rate down as far as the secondary market levels will allow you to do so. Every dollar of discount points paid in closing will have an approximate breakeven from monthly interest savings of 3-5 years, and since you have the equity you can finance the discount points so that the equity itself is paying for your 5 year breakeven point without hitting YOU for a cash outlay.

2) Set up a 100% CLTV 2nd HELOC, left undrawn, but available to you from here forward at principal residential rates (likely Prime + 1 to 2.)


NOW... having just curcumscribed that strategy (which I have, indeed, employed on a SFR I own, while occupying, about a year prior to moving & converting to a rental...)

LET ME ALSO EXPLAIN that I still own the 2/2 Condo that I bought as my first home... and we financed it on the (back then) red-hot 6 month LIBOR ARM, which was (back then) about 3.125% interest.

While short term interest rates have indeed steadily crept upwards... that 6 month LIBOR ARM is still just 5.75% on a remaining $90,000-ish balance... which is less than (or too close to matter) what a 30 FRM could be secured for... and a bought-down 30 FRM wouldn't reap sufficient savings to pay the transaction costs (even for me,in the biz.)

SO... to boil that all down;
KNOW the strategies and legalities... and then, still, run the real numbers to see what makes sense or not.

Best of luck as you grow & move!
Dave Donhoff
National Mortgage Banker/Broker
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