Pay off HELOC with own money or w/Cash-out Refi?

Question

Hello everyone! Complete newbie here so I'm starting to research and get educated so that I can buy my first investment property this year! I'm in San Diego, CA and my primary home has built quite a lot of equity.

3 years ago I took out a HELOC to pay off some credit cards, my student loan and some small house projects. I still have about 50k to finish paying it off. I'm thinking of using the equity in my home to finance an investment property when I find it.

My question is, should I pay off those 50k left on my HELOC with my own cash savings? Or just roll-it into a cash-out refi? Or do something else? I'm trying to maximize the amount of money I can get from my equity so that I can finance as many investments as I can to get me started. I'll probably be investing OOS since SoCal is so expensive 😒

Thank you all in advance for your your help!

Robert Comstock · Answer

few things here from my limited experience.....

1. what is the rate on the original home loan because rates have shot up in the last couple months a bit...if your current rate is higher or about the same it makes sense to do it now.  Then pay off the heloc (if #3 is not a issue), because when you find your investment property you can just use the heloc again for the down payment.  Remember though, helocs are variable rate debt (I believe) and if rates start to climb that debt will start to hurt.

2. what's your timeline to pick up the investment....remember it will take about a month to get the equity cash out loan done so if you wait till you find the deal to start the refi, you may have a problem.

3. Sometimes they (the lender) wont let you use the HELOC to (officially) purchase other property so make sure with your lender that's not an exclusion

4. IF (big IF) your not in love with your current house you could sell it, taking equity gain tax free (if 2+ years living there already) and then use that money to house hack a bigger or multi property. That way it keeps you in San Diego and gets you on the rental ladder (if staying in San Diego something you want).  This will also possibly allow you to value-add by both remodeling and possibly adding ADU's.  Adding a twist to this, depending on where you purchase, you could turn your rentals into short-term or executive/traveling nurse rentals to boost the income...provided your willing to self manage.

Thom MacFarlane · Answer

Do a cash-out refinance to tap some of your equity to include paying off your heloc and other debt.

From a lender’s perspective, when buying real estate using a heloc for a down payment, the new payment for the cash advance on  the  heloc is calculated into  your overall debt-to-income ratio.  I wouldn’t be surprised, with increasing rates, that lender will re-institute a policy of using an increased “qualifying rate” rather than the “actual rate” on a heloc for loan qualifying.

Bottom line for investment prospects is that it is  easier to qualify for a future loans by consolidating all non-mortgage debt and using your cash for down payment to secure financing for your next real estate acquisition.

Wesley I. · Answer

@Rosy Rodriguez

If it was me, id look into rolling the HELOC into a refi with a FIXED rate and see where I stand with the monthly payments. If my new monthly payments are still below what the market rents are, id probably pull the trigger and save cash to buy another primary and rent out the existing.

Alex Gurvitz · Answer

There's a good old financial saying: "Money today, is better than money tomorrow." It is always good to have cash on hand, especially in these unpredictable and volatile times (with COVID), and shutdowns.. No one can tell which way this Market will go... Banks can always stop/limit lending if there are further shutdown due to this pandemic, or other calamities. You can always use the cash that you have on hand for the downpayment, or other desirable investments of your choosing. It also depends on the interest rate of your HELOC... With Cash on hand - you can always make moves. I wish you the best of luck!

Will Fraser · Answer

Hi @Rosy Rodriguez!  In my opinion you'd be better off holding the cash you have on hand and capturing the increased equity you have in your home through a Cash Out Refinance.  If you have sufficient equity to pay off the HELOC and have a nice chunk left over then you've increased your purchasing power and only raised your monthly debt obligations a little, or perhaps you even lowered it when you factor in the HELOC payment.

Kerry Baird · Answer

I agree with the post above.  It is wise to keep some cash aside, have long term fixed rate debt.  The HELOC has its place, but they are also adjustable.

Kerry Baird · Answer

@Steven Browne, Welcome to BP, firstly.  I think that is the safest use of HELOC funds, to use them for a quick renovation, pay off and do it again.  Be aware of DTI as a HELOC is like a large credit card and high utilization can throw everything off.

Steven Browne · Answer

Hi All - I am hoping to get validation on whether this would work or not. Here goes:I am planning on buying my first foreclosure and will be using the strategy of full cash offer via the HELOC that I pulled out a few years back. And simply rehab, selling, paying the HELOC off and finding another property to do the same thing. Question: does my logic make sense that I could use HELOC money to pay off the monthly interest only payments while rehabbing and selling? Example: I purchase a $100K foreclosure using HELOC money. Start rehabing and putting in another $30K for rehab costs, and perhaps the rehab takes 60 days. Place back on market and sell house within 120 days. Instead of just taking out the $100K + $30K of HELOC to pay for the $100K purchase price + rehab, I take an additional, let's say $20K from the HELOC and transfer it into the LLC business checking account and consider this my "Holding Reserves" in order to pay off the month interest - only HELOC payments until the house sells.

In short, I am taking an additional amount of credit from the HELOC, essentially converting it to dollars within a banking checking account and in turn using this cash reserve to pay the interest only payments until the house sells. Of course the interest-only payment increases with the additional $20K but considering its interest only, it would not be a significant amount.

Does my logic make sense? Has anyone done this?

Rosy Rodriguez · Answer

@Wesley I. yes, fixed is what I want because my HELOC is variable. I've thought about that option to rent my current if I can find another primary. Thank you!

Rosy Rodriguez · Answer

@Robert Comstock all very good points! Especially the one about the timing of the refi - thank you for bringing them up! So it seems time is of the essence for me and I should act quickly because my home loan interest rate is high compared to what rates are now. And as it is a variable rate it will start climbing soon. I do love my home and I don't want to get rid of it but I am willing to rent it out if I can maybe find multi property or something with an ADU to house hack.

Pay off HELOC with own money or w/Cash-out Refi?

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