[USER]

Our primary residence has a mortgage on it around a 6.5% interest rate. Our plan has been to refinance if rates ever go down

But last night I was thinking that we have a second property that is fully paid off.

I feel like it makes more sense to do some sort of cash out refinance on the secondary property, and then pay off my primary residence when the time comes.

Main reasons would be if something ever happens, such as a housing market crash followed by job loss, I would only be at risk of losing my secondary property and not my primary residence.

Is there a difference in the rates you get and the costs you pay for a refinance versus doing some sort of cash out refi on the secondary property?

It would require about a 65% LTV on the second property. Is that doable for cash out refi?

[Mike]

65%’s probably doable. How do you use the second property? Secondary residence, AirBNB, long term rental?

Considering your primary rate isn’t super favorable, if the second was generating income, it would probably make more sense to have the I terest over there.

(Assuming you aren’t getting much / any benefit at tax time off the the interest from your primary).

Alternately, if you’re willing to lose the secondary in a downturn, would you be willing to sell it now and not have the extra bills?

Unsure of tax implications, if you could do a primary residence last 3 of 5 exemption on gains, etc.

[Felix]

So, a few things:
– you would have to have the DTI and means to get a mortgage on the secondary property for conventional financing. Otherwise you’d have to go with non-QM options which are much more costly

– whether conventional second home financing or non-QM the interest rate will be higher than a primary home loan (traditional is usually 1% higher, non-qm 2% higher)

– on a secondary home you will only be able to get out 80% LTV at most, but if non-qm some places will want to give only 75% so ask that upfront.

– closing costs for either are expensive, more for non-QM once again

– when you go to get the mortgage they will ask you what it’s for. Don’t say to pay of your primary, say it’s to pay down bills and remodeling (which you do everyday).

– one benefit of doing this is the tax write off. Your home mortgage now you can only claim the interest on your primary home whereas with the rental the entire mortgage is counted against the income. This should help reduce your tax bill.

– another benefit is that the cash out refi is tax free money in your pocket. You don’t pay any taxes on the money you cash out.

– your logic of primary home being at risk is totally illogical, and there is no logic, formula, or sound financial advise that says to pay off your primary home like this.

HOWEVER, the peace of mind of having a paid off home is absolutely unmatched! It’s a feeling of security money can’t buy and alleviates the even remote thoughts like you have of your primary being at risk.

[David]

Rates are higher for second home and investment properties. Due to the risk of what you just said

[Tkacik]

That sounds like an option depending on the rates. You can always use an equity line and pay down your primary and recast it.

Equity lines are usually variable so would automatically lower as rates go down.

[Author]

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