Don’t Sell Your Home, Turn it Into a Rental!

Instead selling you residence to purchase another home, you may decide not to sell your residence and turn it into a rental property. In this case, the next house that you purchase and live in once again qualifies you for the lower owner-occupied loan rate. This approach also makes it easier to make repairs to the rental house because, having lived there, you already know the tricks on how to fix the things that typically need repair.

A system that I use is to refinance my residence about a year before I plan to buy a new residence. This gives me enough money for a down payment on the next house that I will purchase. When I locate a good fixer-upper I can quickly purchase it. During the 3-4 weeks it takes to close on the new house, I prepare the old house so it will be ready to rent. This usually involves some painting and landscaping. Then, before I close on the new house, the “for rent” sign goes up on the old house.

The 3 steps in this technique:

1.) refinance your residence.

2.) use the refinance money as a down payment to buy a new house.

3.) move into the new house and rent out the old house

Under this technique, you get the lower “primary residence” interest rate for both the old property and the new one, since each property is your primary residence at the time that you take out the loan.

When I did my first refinancing of a townhouse that I owned, I received a rate of 6.1%. The rate for my original loan was 7.5%. The original purchase price was $52,500 but the value had increased to $82,000 ten years later. I had also paid off about $10,000 of the mortgage principal over the course of the ten years.

When refinancing, you should keep 20 percent of the value of the house in the house to avoid paying private mortgage insurance and to pay a lower interest rate. After refinancing the townhouse, my monthly mortgage payments went down from $535 per month to $518 per month, even after taking a little less than $20,000 out for the down payment on the next house I purchased.