Q: I have two homes in two different cities. One of them is a rental and the other is our primary residence.
My wife and I have excellent credit and we have an existing home equity line of credit (HELOC) on our primary residence with about a $20,000 balance. We get excellent offers from other lenders advertising their equity lines with zero closing costs and no fees.
The offers are amazing, but once we inform the lenders that our property is a rental, they don’t want to give us the low rate or waive fees. Would it be wise to extend our line of credit at 4.25 percent or get a HELOC loan on the rental property given that the equity is enough to pay the other off?
Or should we think about combining both the first and equity line of credit into a single mortgage. Is that possible? What are some of our options? We just want a better rate. We have paid off about half of each of the mortgages.
A: The easy answer to one of your questions is that you will find it nearly impossible to get one loan to cover both of your properties. You might find a lender to give you one loan over multiple investment properties. But it will be extremely difficult to find a lender willing to wrap your primary and investment property into a single loan. That loan would fall far outside the traditional lending guidelines and make it very difficult for the lender to give you a loan on that basis.
And, you’ll have a tough time finding a residential lender willing to give you the interest rates you’ve seen advertised for a loan against your rental property. Those loans are for residential properties that are owner occupied. It’s an entirely different risk category than an investment property.
If you can’t combine your loans, you can only try to get your home refinanced or your rental property refinanced. As you have found out, it’s not that easy to find a lender to refinance your investment property at rates that approach rates given to residential homeowners.
You may also find it quite difficult to obtain a HELOC on the investment property, as opposed to refinancing the loan. Just as you found out that there are few lenders willing to give first loans on investment properties, there are even fewer who want to give HELOCs on those properties.
You should look at what kind of interest rate you can get if you decide to refinance the investment property and if you like what you find, you should proceed with that lender.
But you are correct, the rate and costs will be higher for an investment property loan. However, those costs and expenses can frequently be used to your tax advantage on your federal income tax return. Talk to your accountant and see how your current interest expenses impact your income and your tax return and then see what would happen if you lowered those expenses.
You can try to refinance or take out additional financing on your primary residence to lower your costs on your investment property, but your interest expenses on your home is deductible on your federal income taxes differently than the interest on your rental property.
For example, if you were to pay off your mortgage on the rental property and you take in more money in rent than your expenses for the investment property, you may have to pay taxes on that income. But if you have a loan on the investment property, your income may be offset by your costs and have no tax to pay.
You also may get the advantage on your federal income taxes for depreciating the value of your rental property and that depreciation can factor into what you decide to do. The decision to take money from your personal side to pay down your debt on your rental property can complicate your federal income tax situation.
If you have decided that it is to your benefit to use money from your primary residence to pay down your debt on your rental property, you might want to try to refinance your home loan at today’s historic low rates. You may not even need the home equity line of credit (HELOC) anymore if you’re able to get a primary loan large enough to cover your existing first loan and the balance on your HELOC.
So, shop around and look at all of the possibilities before you lock in. Just make sure you have a great mortgage lender or broker to work with on these issues and you have gone over your situation with an accountant that can walk you through the tax advantages and disadvantages of your current situation and what will happen if your financing for each property changes.
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