Jack & Diane currently own 1 property, the one they are living in. They would like to buy a rental property to diversify their investment portfolio. Keep in mind, you need a minimum 20% down-payment to buy a rental property and get best rates.
Here is how a lower rate can help you buy a better rental property.
Background: Jack & Diane currently owe $200,000 on their $350,000 house; they have monthly mortgage payments of $1220. Between the 2 of them, Jack & Diane make about $100,000/year and have debt payments of $800/month. They have some investments they could use for down-payment on the new rental property but would like to leave them alone if possible.
When Jack & Diane went to the Bank: The banker told Jack & Diane about a Home Equity Line of credit that they could put on their existing house. The bank offered Jackie & Diane a Home Equity Line of Credit at Prime + 1%*. He told them they could take up to $80,000 worth of equity out of their house with interest only payments of $263/ month.
The banker took that information, and told Jack & Diane what kind of rental property they could buy and what their maximum purchase price was. Based on all the information above and a bank rate of 4.19% for a 5-year term, Jack & Diane could qualify for a maximum rental property purchase price of $250,000.
When Jack & Diane came to the MortgageGirls: Martene told Jack & Diane about a Home Equity Line of Credit that they could put on their existing house. They could use this Line of Credit for down-payment instead of withdrawing their investments and paying taxes on them. The MortgageGirls offered Jack & Diane a Home Equity Line of Credit at Prime + 0.25%*. She told them they could take up to $80,000 worth of equity out of their house. She also clarified for them that would have interest only payments on only the money they used. As a line of credit is re-advanceable and fully open, you can use it, pay it down, and then re-use it again. But if they took out the whole $80,000, interest only payments would be $213/ month.
Martene took that information, and told Jack & Diane what kind of rental property they could buy and what their maximum purchase price was. Based on all the information above and an awesome rate of 3.09% for a 5-year term, Jack & Diane could qualify for a maximum rental property purchase price of $280,000.
Bottom Line: The fact that The Mortgagegirls were able to get them a lower rate gave Jack & Diane a maximum purchase price $30,000 higher than the bank’s maximum. $30,000! That could mean the difference between a regular 3-bedroom house and a house with an already completed basement suite that could greatly increase your rental property cash-flow.
* Prime Rate is 3% as of August 11, 2011. Rates subject to change without notice. O.A.C. E &OE.
