Gorman sets up a simple LLC (limited liability company) to hold a second mortgage on the house at a higher rate than the first. “You can do this a couple of times a year. As time goes on, you will create a substantial side income.” He says that he did this three or four times per year over 15 or 20 years and never lost a dime.
Refinancing with a new mortgage is not as easy today as when property values were skyrocketing and interest rates were low, but it’s still appropriate in some cases. “Even today, you see some people with higher-than-market interest rates and a lot of equity, which makes this a viable strategy,” Gorman says. That makes it a good idea to ask prospects about their current interest rates when talking about financing options. Some people will include extra cash for investments if they can get a higher rate for that money than they are paying for the mortgage.
Financing on the improved home value is where the lender lets the borrower refinance for the projected value of the home after the improvements have been completed. It’s only appropriate for large projects, and it requires that the contractor have some market knowledge and financial sophistication.
Some lenders are more aggressive about chasing these loans than others. For instance, Countrywide Financial has a formal One-Time-Close program for large remodeling projects where the cost of the renovation is 50% to 60% of the existing value of the home. It’s a combination construction loan and mortgage, according to Al Dimoush, the company’s executive vice president of National Construction Lending.
Say that your customers have a home worth $500,000 and they want a $300,000 remodel, including some interior work and an addition. An appraiser determines that the completed house will appraise for $800,000, so they get approved for $720,000, which is 90% of the appraised value. At closing, $400,000 goes to pay off the underlying first mortgage. The remaining funds are drawn out as the project progresses. During construction, the customer makes interest-only payments. They start by paying interest on the $400,000, then on increments as the construction loan is drawn down. When construction is complete, the loan automatically converts to a permanent mortgage.