"My wife and I have $100,000 remaining on the 15-year mortgage for our current home in Illinois. This has been our primary residence for the past 7 years and we want to refinance into a 30-year mortgage and and take out the maximum cash allowed. Similar properties are apparently selling for roughly $1MM. We have excellent credit and no debt outside of this mortgage.
We want to move to a larger home in 8-15 months and are considering keeping this home to use a rental. I've listened to some real estate podcasts lately and have learned that it isn't that wise to have your own house completely paid off! However, I haven't been able to find much information.
Questions:
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What is the maximum loan we can take out on this house?
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If we plan to rent it out either in 6 months or worst case, 1.5 years later, is that OK?
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Would we have any issues getting another residential loan in 6 months? (1 year?)
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How do you calculate how much you can borrow? I've heard 38% of gross salary and "70%" of rental income.
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Are interest rates going up?
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What is a good resource to ask questions? I did not see anything in the new use orientation section. Who would be extremely knowledgeable about subjects like these?"
Answers:
Get comfy and let’s go through these questions one-by-one.
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If you are going to get a conventional mortgage (backed by Fannie Mae or Freddie Mac) the maximum Loan to Value (LTV) for a cash-out refinance on a primary residence is 80%. So you can get a loan for 80% of your home’s appraised value. Conventional mortgages come with a limitations on just how big of a mortgage you can obtain, though. The 2o2o conforming limit for all counties in Illinois is $510,400. So, you can take out a loan for 80% of your home’s value or the max loan amount in your county, whichever is less. If you decide to get a jumbo loan there is no max loan amount, but the LTV is typically limited to 75% with most lenders.
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Yes, it is okay if you decide to rent out the home and buy a new primary residence regardless of when you took out the new mortgage on your current home. You will just have to provide a letter of explanation saying that you decided to buy a new primary residence because your current home is too small, too far from work, etc.
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Good news here! You shouldn't have any problem getting a new mortgage in this timeframe.
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With a conventional mortgage, you can have a maximum Debt to Income (DTI) ratio of 50%. This includes your housing payments and all other liabilities. If you make $10,000 per month you can have $5000 in total liabilities. Your DTI is based on your gross income, before taxes and deductions. But what about the rental income?!...You can use 75% of the projected rental income from the home you will be vacating to qualify. Here's an article that explains more about using your future rental income to qualify for a mortgage.
Rental income calculation example: Gross rent ($1000 x 75% = $750) - housing payment ($500) = $250
So the full mortgage payment would be offset (not included in your DTI), and you would add $250 to your qualifying monthly income! -
Interest rates are low right now, which means it's a great time to refinance. That's not to be overlooked. However, rates go up and down and anyone who tells you that rates today are lower than they will be a year from now can't actually guarantee that.
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What a great question! You can email us, call us, comment below, or use our website's chat feature to ask any mortgage questions that you need answered. We're happy to help!
