Re-Financing your $Property

[Agamemnon]

Hey all,

Just thought I'd start a thread talking about re-financing advice, tips, no-no's, etc.

In this crazy real estate market a lot of people are re-financing their old 100k mortgage because their property is now worth 300k. Any stories out there of people who have re-financed, and for how much? Best place to look for a new mortgage? What did you do with the money, invest it? Renovate? Blow it? What on?

Also, I am thinking very strongly about getting a Home Equity Line of Credit (HE-LOC). The jist is you only pay interest payments for month along the lines of a regular line of credit, and you make principal payments whenever you want (if ever), and the loan has no term (you could pay it for 100 years interest-only if you wanted).

I'm getting about 46,000 to do what I like with, so I figured I'd spend 10k renovating the condo and another 20k on a car (I need one bad). Maybe put the rest in RRSP's?

Stories/tips/advice?

[V]

I didn't refinance my property, but I went to ATB for a HELOC. They offer them at 0.51% below prime for the first year, and then at prime after that. Only interest payments if you want. They gave me 80K. I immediately turned around and purchased a property for 237K. Took 60K from the HELOC for the downpayment, and the rest of the HELOC will be used for expenses on the property that can't be covered by rent. I have another unsecured LOC through TD for 30K, so I'll be using that credit to pay the interest on the HELOC, and the HELOC to pay the interest on the LOC. The interest is tax deductible, and I don't have to spend a penny of my own finances. Gotta love it. I don't think the market's done yet. I sure hope not, at least. Already, the house is worth about 10K more than I paid for it, and I don't take possession until August 1.

But yeah, back on topic, most banks will only give you a HELOC for up to 75% of your house's appraised value. So if they appraise you at 350K, and you have 200K left on your mortgage they'll only give you a maximum of 62.5K.

So I guess it depends on how much you re-financed, whether or not you'll be able to get a HELOC.

[MolsonInBothHands]

Yup we just went through the same thing. To sum it up, a house we bought in Airdrie four years ago was appraised for 120,000 more than we paid for it. We just consolidated a bunch of other debts and now have one loan payment, the remainder of the equity we used to buy recreational property at Gleniffer Lake. (Line of credit, interest only payments for now.)

I don't think I would have done it normally, but the deal we got at the lake was too good to pass up, and it is something my wife can enjoy even when I work away from home. She would not tow the holiday trailer herself. Talking with others at the resort, property prices have been steadily increasing, so hopefully it can pay some dividends down the road.

[Tron_fdc]

Hey Dom, quick question:

Did you turn your existing mortgage into a HELOC, and used the cash you gained as a down payment for ANOTHER mortgage? I wasn't aware you could do that....

[V]

Well, I didn't turn my mortgage into a HELOC, I got a HELOC from a completely different bank than my mortgage is through. They are completely separate, except for the fact that the value on my mortgage had to be determined before I knew how much of a HELOC I could get.

But yeah, I used the money in my HELOC to put a downpayment on a rental property. People all over the city have done it, according to my mortgage broker.

I know fotze mentioned before that he thought it was illegal to use borrowed money to purchase a property, but that just isn't the case. People have been doing that for years and years. My buddy in the office in here sure didn't use his own money to buy 13 properties.

[Agamemnon]

Originally Posted by Tron_fdc

Hey Dom, quick question:

Did you turn your existing mortgage into a HELOC, and used the cash you gained as a down payment for ANOTHER mortgage? I wasn't aware you could do that....

I believe you can definitely do this (but someone correct me if I'm wrong).

You re-finance your existing property into a HE-LOC, take out the extra equity so that you've still left 25% of the (HE-LOC) property value in the HE-LOC. Take the rest and do whatever you like, if it happens to be $50k, put a downpayment and buy another house to rent. There are small issues that would have to be dealt with, but essentially you could easily do this.

The thing I like about the HE-LOC is this;
I won't be living in my current property in 3-4 years. Had I got a mortgage, I'd be paying $850/month mortgage, $220 condo fees/$60 property taxes, for a total of $1130/month. The issue with this is, because I know I'm selling in 3-4 years, I don't think it make sense to pay interest-heavy mortgage payments (like 90%) for 3-4 years and then sell. The equity I'll have built up that way will only be several thousand.

INSTEAD I'll get the HE-LOC, and only pay interest payments ($350), as well as condo/property taxes ($630/month grand total). This leaves me w/ around $500 a month to invest that I would have originally been committing to interest-heavy mortgage payments. So while I'm not actually building equity in the property, I AM taking the $500/month I'm saving w/ the HE-LOC and investing it into RRSP's, so I'll get a fat tax-return at the end of the year to... re-invest into RRSP's (or whatever investment vehicle you choose).

If you're selling within the next few years, I figure it makes great sense. If you're in your house long-term, mortgage is probably the way to go.

[albertGQ]

Originally Posted by Agamemnon

I believe you can definitely do this (but someone correct me if I'm wrong).

You re-finance your existing property into a HE-LOC, take out the extra equity so that you've still left 25% of the (HE-LOC) property value in the HE-LOC. Take the rest and do whatever you like, if it happens to be $50k, put a downpayment and buy another house to rent. There are small issues that would have to be dealt with, but essentially you could easily do this.

The thing I like about the HE-LOC is this;
I won't be living in my current property in 3-4 years. Had I got a mortgage, I'd be paying $850/month mortgage, $220 condo fees/$60 property taxes, for a total of $1130/month. The issue with this is, because I know I'm selling in 3-4 years, I don't think it make sense to pay interest-heavy mortgage payments (like 90%) for 3-4 years and then sell. The equity I'll have built up that way will only be several thousand.

INSTEAD I'll get the HE-LOC, and only pay interest payments ($350), as well as condo/property taxes ($630/month grand total). This leaves me w/ around $500 a month to invest that I would have originally been committing to interest-heavy mortgage payments. So while I'm not actually building equity in the property, I AM taking the $500/month I'm saving w/ the HE-LOC and investing it into RRSP's, so I'll get a fat tax-return at the end of the year to... re-invest into RRSP's (or whatever investment vehicle you choose).

If you're selling within the next few years, I figure it makes great sense. If you're in your house long-term, mortgage is probably the way to go.

And to add, with a HELOC there is no penalties for you to pay when you sell your house and pay off the entire HELCO, whereas, there will be with a mortgage, so that will save you a couple thousand dollars too

[Agamemnon]

Originally Posted by albertGQ

And to add, with a HELOC there is no penalties for you to pay when you sell your house and pay off the entire HELCO, whereas, there will be with a mortgage, so that will save you a couple thousand dollars too

And to add to THAT, I've been told that you can borrow off the same HE-LOC and invest that money, and that interest on money you 'borrow to invest' is tax deductible. Not exactly sure how that works, probably limited to certain types of investment (RRSP?), sounds interesting though.

[V]

As far as I know, the interest you pay on any money you borrow to invest is tax deductible. Doesn't matter if it's for RRSPs or a second property or what.

So instead of waiting to horde enough money so that I can put a downpayment on a second house, I borrow the money and the interest on that money is tax-deductible. It's a great system. I guess the lousy thing is that as of right now I have 400K worth of debt. It's all making me money, but I suppose it's a little scary if you're averse to debt.

[Agamemnon]

Originally Posted by Dominicwasalreadytaken

As far as I know, the interest you pay on any money you borrow to invest is tax deductible. Doesn't matter if it's for RRSPs or a second property or what.

So instead of waiting to horde enough money so that I can put a downpayment on a second house, I borrow the money and the interest on that money is tax-deductible. It's a great system. I guess the lousy thing is that as of right now I have 400K worth of debt. It's all making me money, but I suppose it's a little scary if you're averse to debt.

Thats sort of the big thing; how much risk can you carry and how leveraged are you willing to be? If you're young, single, have a good job in a good market... risk is probably your friend. Everyone takes on varying degrees of it, some not nearly enough...

[Red]

Allow me to be painfully honest....
It is very stupid to finance your house and use that money to buy depreciating assets (car) or RRSPs.
What is the point of buying RRSPs that will earn you 3% when it costs you 6% to finance that very purchase?
I guess you could invest the RRSPs in the (increasing unstable) markets, but that's not any smarter.
What is the point of buying a car and repaying the loan over 20 years or whatever you chose your mortgage for.
What happens when the housing goes down 10 years down the road? Some people will have more mortgage debt than assets.
In these prosperous times it should be a priority to get rid of debts rather than trying to accumulate more.
Sorry to rant, but that's how I feel about this. You asked for advise, mine is to not re-finance.

[V]

Originally Posted by Agamemnon

You re-finance your existing property into a HE-LOC, take out the extra equity so that you've still left 25% of the (HE-LOC) property value in the HE-LOC. Take the rest and do whatever you like, if it happens to be $50k, put a downpayment and buy another house to rent. There are small issues that would have to be dealt with, but essentially you could easily do this.

The thing I like about the HE-LOC is this;
I won't be living in my current property in 3-4 years. Had I got a mortgage, I'd be paying $850/month mortgage, $220 condo fees/$60 property taxes, for a total of $1130/month. The issue with this is, because I know I'm selling in 3-4 years, I don't think it make sense to pay interest-heavy mortgage payments (like 90%) for 3-4 years and then sell. The equity I'll have built up that way will only be several thousand.

INSTEAD I'll get the HE-LOC, and only pay interest payments ($350), as well as condo/property taxes ($630/month grand total). This leaves me w/ around $500 a month to invest that I would have originally been committing to interest-heavy mortgage payments. So while I'm not actually building equity in the property, I AM taking the $500/month I'm saving w/ the HE-LOC and investing it into RRSP's, so I'll get a fat tax-return at the end of the year to... re-invest into RRSP's (or whatever investment vehicle you choose).

Ag, are you saying that you don't have a mortgage at all? Just a HELOC? Interesting. How do they regulate your limit on what you can withdraw from the HELOC, since they'll only let you borrow up to 75% of the house worth? I think it makes sense as long as you owe less than 75% on your mortgage before you make the transition over to exclusively a HELOC. Also, the above is a fantastic way to do things IF you have the ability to sock away that money. MissKat, you might not want to try this.

If you're selling within the next few years, I figure it makes great sense. If you're in your house long-term, mortgage is probably the way to go.

This came up in a thread a few weeks ago when someone thought about their grandparents that bought a house for 8K way back in the day. What if they only paid interest and no principal over the last 40 years? They'd only have an 8K mortgage right now, and their house could be worth as much as 500K for example. Interesting idea, although that is a lot of interest to pay if you think in today's values. Would you want to pay interest on 300K every month for the rest of your life, even if it meant your house was worth 3 million dollars in 40 years? You're probably right, it's probably better to pay down some principal as you go if you're planning on owning a house for the next 50 years.

Of course, the way interest rates are right now, every penny I put against the principal of my mortgage yeilds only a 5% ROR or so. You can make a lot more money than that right now. However, if interest rates climb to 8% or higher paying down your mortgage suddenly doesn't look like too bad of an investment. Who knows, maybe interest rates hit 20% again one day in the next 30 years. I'd rather see myself mortgage free at that point than owing the bank 300K.

[SeeGeeWhy]

Hookers and Blow.

[V]

Originally Posted by Red

Allow me to be painfully honest....
It is very stupid to finance your house and use that money to buy depreciating assets (car) or RRSPs.
What is the point of buying RRSPs that will earn you 3% when it costs you 6% to finance that very purchase?
I guess you could invest the RRSPs in the (increasing unstable) markets, but that's not any smarter.
What is the point of buying a car and repaying the loan over 20 years or whatever you chose your mortgage for.
What happens when the housing goes down 10 years down the road? Some people will have more mortgage debt than assets.
In these prosperous times it should be a priority to get rid of debts rather than trying to accumulate more.
Sorry to rant, but that's how I feel about this. You asked for advise, mine is to not re-finance.

Wow, I couldn't disagree more (obviously). Except for some of it. I agree, it is completely idiotic to borrow gobs of money from the bank to purchase depreciating assets. Ridiculous that I hear of some people doing this. Oh well, if people think they can handle it, all the power to them.

3% on your RRSPs? Is this all you're making? Ouch. Don't forget the fact that every dollar that goes to RRSPs comes out of your taxable income, so the change in your tax return should be included in the ROR as well. That alone would probably exceed your 3%.

Banks are willing to give me gobs of cash, and only want 6% interest in return. How can you not take that???!? How hard is it to make 6% in today's market? I can tell you, not hard at all. If you're not making 10% AT LEAST you're doing something wrong.

What happens if the housing market goes down over the next 10 years? Let me tell ya, if it takes 10 years for the market to fall I'm going to be one rich sucker. I'm not counting on more than 2-3 years before something happens to the housing market, and even then I'm expecting earnings in the 200-400K range.

Consider this. Those people that right now own 10 houses. Do you think they saved up until they could purchase them without borrowing any money? I can guarantee you they didn't. And yet, I know a couple of those people and they are all set for life. Debt does not have to be a bad thing, as long as you manage the risks properly.

As for your (next to) last statement, these are the times to borrow, borrow, borrow. The money's practically free! Why not use it to make more money?

Who knows, maybe in 2 years I'll be on here crying the blues and asking for handouts. I'd be willing to bet that won't happen, though. Of course, I won't be able to honour the bet if I lose, because, well, I won't have any money.

[Agamemnon]

Originally Posted by Red

Allow me to be painfully honest....
It is very stupid to finance your house and use that money to buy depreciating assets (car) or RRSPs.

Well... I have a property that gained 200k in value. I have a beat up broken Toyota Corrolla and a condo that I'd be ashamed to bring any woman over to. I figure a car and renovation (adding value to the property) are investments in 'me' and my happiness... not to be undervalued.

What is the point of buying RRSPs that will earn you 3% when it costs you 6% to finance that very purchase?

Well... I suppose it all depends on the math you used. Yours, for example, is wrong. If I put 1000 into my RRSP's, do I not get back on my tax return something like 200-400 (based on my income tax rate)? Wouldn't that make my 'one-year return' on the RRSP its percentage increase + tax return value (some 30-40%)??

But I'm no expert, so let me know where I'm lost here.

I guess you could invest the RRSPs in the (increasing unstable) markets, but that's not any smarter.

You fail to say why.

What is the point of buying a car and repaying the loan over 20 years or whatever you chose your mortgage for.
What happens when the housing goes down 10 years down the road?

I've re-financed at a property value of 180k. The property is worth 300k. I don't think I'm over-leveraged.

Some people will have more mortgage debt than assets.
In these prosperous times it should be a priority to get rid of debts rather than trying to accumulate more.

No, your priority should be to always earn higher interest on your investments than you pay on your debt. It makes sense to have debt and assets, as long as your assets are growing faster than your debt interest-wise. If you have no debt, and no capital, you're not much better off. This is often why companies have debt; to provide capital to provide greater returns than the cost of the debt.

Sorry to rant, but that's how I feel about this. You asked for advise, mine is to not re-finance.

Well... thanks for your input. Are you a financial advisor or something? Do you own property?

[Agamemnon]

Originally Posted by SeeGeeWhy

Hookers and Blow.

I'm way ahead of you... 10k already gone in 8 hours!

[Agamemnon]

Originally Posted by Dominicwasalreadytaken

Ag, are you saying that you don't have a mortgage at all? Just a HELOC? Interesting. How do they regulate your limit on what you can withdraw from the HELOC, since they'll only let you borrow up to 75% of the house worth? I think it makes sense as long as you owe less than 75% on your mortgage before you make the transition over to exclusively a HELOC. Also, the above is a fantastic way to do things IF you have the ability to sock away that money. MissKat, you might not want to try this.

I don't have a mortgage, just a HE-LOC.

They regulate the limit on what I can withdraw to 75% of the property value. So if I bought the property for 100k and put 25k down on the property, and it shot up to a total value of 300k, they would let me borrow up to 75% of that total. So, because I already borrowed 80k (100k - 20k downpayment), they'd give me up to 225k total (145k cash). You'd end up with a 300k property, 75k in equity (25% value), and 145k cash-in-hand, owing 225k on the place (HE-LOC payments of around $500/month).

It doesn't really make sense unless your property has gone up a lot in value, and your equity in it exceeds %25.

[Red]

Originally Posted by Dominicwasalreadytaken

Wow, I couldn't disagree more (obviously). Except for some of it. I agree, it is completely idiotic to borrow gobs of money from the bank to purchase depreciating assets. Ridiculous that I hear of some people doing this. Oh well, if people think they can handle it, all the power to them.

3% on your RRSPs? Is this all you're making? Ouch. Don't forget the fact that every dollar that goes to RRSPs comes out of your taxable income, so the change in your tax return should be included in the ROR as well. That alone would probably exceed your 3%.

Banks are willing to give me gobs of cash, and only want 6% interest in return. How can you not take that???!? How hard is it to make 6% in today's market? I can tell you, not hard at all. If you're not making 10% AT LEAST you're doing something wrong.

What happens if the housing market goes down over the next 10 years? Let me tell ya, if it takes 10 years for the market to fall I'm going to be one rich sucker. I'm not counting on more than 2-3 years before something happens to the housing market, and even then I'm expecting earnings in the 200-400K range.

Consider this. Those people that right now own 10 houses. Do you think they saved up until they could purchase them without borrowing any money? I can guarantee you they didn't. And yet, I know a couple of those people and they are all set for life. Debt does not have to be a bad thing, as long as you manage the risks properly.

As for your (next to) last statement, these are the times to borrow, borrow, borrow. The money's practically free! Why not use it to make more money?

Who knows, maybe in 2 years I'll be on here crying the blues and asking for handouts. I'd be willing to bet that won't happen, though. Of course, I won't be able to honour the bet if I lose, because, well, I won't have any money.

Good luck with all that. Really. Life is not that simple. You will find out sooner or later.

Also, talk is cheap. Talking about investing it and earning that kinds of returns is one thing, actually doing it is a whole other thing.
I invest in Mutuals, I've earned about 10% per year on average, which is not bad. But I invested my own money so I can afford to sit on them IN PEACE when markets are down. People that have huge debts can't. They usually opt out and lose in the end. That's a fact.

[Agamemnon]

Originally Posted by Red

Good luck with all that. Really. Life is not that simple. You will find out sooner or later.

Also, talk is cheap. Talking about investing it and earning that kinds of returns is one thing, actually doing it is a whole other thing.
I invest in Mutuals, I've earned about 10% per year on average, which is not bad. But I invested my own money so I can afford to sit on them IN PEACE when markets are down. People that have huge debts can't. They usually opt out and lose in the end. That's a fact.

So... your general response to the facts and points raised against your 'rant' is 'life is not that simple'.

Maybe not; but financial life has a set of rules and facts legislated and encoded into law. You can actually talk about these rules and facts without having to 'actually be in the market' to get the rules and facts straight. Math doesn't change in relation to your investments. You said 3% is what one can expect off RRSP's. In you first year alone, factoring in your tax return, your return could be higher than 30%. Oh... but I guess 'life is not that simple'?

[Mike Oxlong]

Amen Dom!!!

There is good debt and bad debt. Buying a car with your equity isn't a great idea. It is a depreciating asset. However buying a house is a great debt to get into. The house is going up in value, you have someone paying off the mortgage and the bank is lending you the money to buy it. It doesn't get much better.

Even if the housing market takes a bit of a dip which I don't expect for a LONG time it will recover and prices will continue to climb. Real Estate prices have always climbed over the long run throughout history. Your asset will continue to climb in value while the mortgage gets paid off. Debt that makes you money is not a bad thing at all. A very smart investment.