Heloc vs cash out refi on current primary to purchase a STR
Realtor · Richmond, VA · Member since 2017 · 35 posts · 4 votes
Heloc vs cash out refi on current primary to purchase a STR
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Jacob SloopBusiness Member
Rental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votesHey @Caitlin Stables
There's a ton of info on here on that subject and it depends on your personal situation to some extent.
I would start talking with some local banks and tell them what you're trying to do. The terms on HELOC's have gone up quite a but in the past year so you need some numbers to make sure it even makes sense... If the interest rate is too high etc.
Also what does your current mortgage look like ? Terms aren't the greatest for a cash out refi either, especially if you have snagged a 3-4% interest rate in the past couple years..
11 Replies
- 3yJacob SloopBusiness MemberRental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votes
Hey @Caitlin Stables
There's a ton of info on here on that subject and it depends on your personal situation to some extent.
I would start talking with some local banks and tell them what you're trying to do. The terms on HELOC's have gone up quite a but in the past year so you need some numbers to make sure it even makes sense... If the interest rate is too high etc.
Also what does your current mortgage look like ? Terms aren't the greatest for a cash out refi either, especially if you have snagged a 3-4% interest rate in the past couple years..
- Realtor · Richmond, VA · Member since 2017 · 35 posts · 4 votes3y
Quote from @Jacob Sloop:
Hey @Caitlin Stables
Thanks Jacob, what sort of terms would mean it doesn’t make sense? I’ve found a reputable credit union that can do desktop appraisal for under 150k loan amount which we’d fit into and 100% cltv and they can do up to 15 year term. Anything we should look out for specifically?
There's a ton of info on here on that subject and it depends on your personal situation to some extent.
I would start talking with some local banks and tell them what you're trying to do. The terms on HELOC's have gone up quite a but in the past year so you need some numbers to make sure it even makes sense... If the interest rate is too high etc.
Also what does your current mortgage look like ? Terms aren't the greatest for a cash out refi either, especially if you have snagged a 3-4% interest rate in the past couple years..
- 3yJacob SloopBusiness MemberRental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votes
Interest rates have gone up so you just need to make sure your payments aren't so high that you cant cashflow..
Those are pretty great terms for a HELOC I must say though
Just advising that, especially with an STR, you run some worst case scenarios and ideally have it work as a longterm , with your HELOC payment and mortgage payment
- Real Estate Consultant · Ann Arbor, MI · Member since 2022 · 461 posts · 250 votes3y
Hi Caitlin-
Great question.
If you have a good interest rate on your primary FHA loan, I would use the HELOC option to get the capital you need for the STR.
Look for a HELOC lender that will allow you to fix the rate on the HELOC into a home equity loan so the rate does not keep going up on you unless you are comfortable with that and have enough cash flow from the STR to cover it.
To Your Success!
- Realtor · Richmond, VA · Member since 2017 · 35 posts · 4 votes3y
Quote from @Jacob Sloop:
Interest rates have gone up so you just need to make sure your payments aren't so high that you cant cashflow..
Those are pretty great terms for a HELOC I must say though
Just advising that, especially with an STR, you run some worst case scenarios and ideally have it work as a longterm , with your HELOC payment and mortgage payment
Ok that makes sense, I attached the current terms sheet she sent me.. looks like we’d be at 8.5% for 100% cltv
- Realtor · Richmond, VA · Member since 2017 · 35 posts · 4 votes3y
Quote from @Jeff Roth:
Hi Caitlin-
Great question.
If you have a good interest rate on your primary FHA loan, I would use the HELOC option to get the capital you need for the STR.
Look for a HELOC lender that will allow you to fix the rate on the HELOC into a home equity loan so the rate does not keep going up on you unless you are comfortable with that and have enough cash flow from the STR to cover it.
To Your Success!
Thanks for your input! I just prefer the idea of not paying interest until we draw and not having to take a specific dollar amount. I don’t like the variable rate part of it but the goal would be to pay it off ASAP
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
Quote from @Caitlin Stables:
We own our primary with an FHA loan currently and we should have about 80k or so in equity based on comps. Is there a better v best way to go about this? We ultimately want to own a few local STR's in the Richmond/Central Virginia area and this would be our first investment purchase. I am a local Realtor here so I have that leg up but as far as the funding and financing options go I am totally green. Any help would be appreciated!!
I would use a HELOC if you can get your money back in 18 months. Also I run the numbers on a HELOC 4% above todays rates and make sure the property still cash flows. If I can check both of those boxes I do it. If not, second lien or cash out refi might be better.
- Realtor · Richmond, VA · Member since 2017 · 35 posts · 4 votes3y
Quote from @Conner Olsen:
Quote from @Caitlin Stables:
We own our primary with an FHA loan currently and we should have about 80k or so in equity based on comps. Is there a better v best way to go about this? We ultimately want to own a few local STR's in the Richmond/Central Virginia area and this would be our first investment purchase. I am a local Realtor here so I have that leg up but as far as the funding and financing options go I am totally green. Any help would be appreciated!!
I would use a HELOC if you can get your money back in 18 months. Also I run the numbers on a HELOC 4% above todays rates and make sure the property still cash flows. If I can check both of those boxes I do it. If not, second lien or cash out refi might be better.
With a cash out refi tho we’d lose the 2.5% rate we currently have…a second lien is just like a second mortgage? I’ve been offered really good terms as I mentioned above for a heloc but you make some good points in just being extra conservative adding interest on top of todays rates
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
Quote from @Caitlin Stables:
Quote from @Conner Olsen:
Quote from @Caitlin Stables:
We own our primary with an FHA loan currently and we should have about 80k or so in equity based on comps. Is there a better v best way to go about this? We ultimately want to own a few local STR's in the Richmond/Central Virginia area and this would be our first investment purchase. I am a local Realtor here so I have that leg up but as far as the funding and financing options go I am totally green. Any help would be appreciated!!
I would use a HELOC if you can get your money back in 18 months. Also I run the numbers on a HELOC 4% above todays rates and make sure the property still cash flows. If I can check both of those boxes I do it. If not, second lien or cash out refi might be better.
With a cash out refi tho we’d lose the 2.5% rate we currently have…a second lien is just like a second mortgage? I’ve been offered really good terms as I mentioned above for a heloc but you make some good points in just being extra conservative adding interest on top of todays rates
Totally understand, the interest rate is enticing to keep. What is more important to you, the interest rate of a property or the cash flow of the portfolio? Personally cash flow matters more to me than interest rate. Interest rate is just an input factor to determining cash flow. If you had to refinance your existing loan but you could get a property that would double the cash flow of your portfolio would you do it? My guess is yes. Refinancing is a good option if after the refinance the cash flow is stronger with the two properties than just the one.
- Realtor · Richmond, VA · Member since 2017 · 35 posts · 4 votes3y
Quote from @Conner Olsen:
Quote from @Caitlin Stables:
Quote from @Conner Olsen:
Quote from @Caitlin Stables:
We own our primary with an FHA loan currently and we should have about 80k or so in equity based on comps. Is there a better v best way to go about this? We ultimately want to own a few local STR's in the Richmond/Central Virginia area and this would be our first investment purchase. I am a local Realtor here so I have that leg up but as far as the funding and financing options go I am totally green. Any help would be appreciated!!
I would use a HELOC if you can get your money back in 18 months. Also I run the numbers on a HELOC 4% above todays rates and make sure the property still cash flows. If I can check both of those boxes I do it. If not, second lien or cash out refi might be better.
With a cash out refi tho we’d lose the 2.5% rate we currently have…a second lien is just like a second mortgage? I’ve been offered really good terms as I mentioned above for a heloc but you make some good points in just being extra conservative adding interest on top of todays rates
Totally understand, the interest rate is enticing to keep. What is more important to you, the interest rate of a property or the cash flow of the portfolio? Personally cash flow matters more to me than interest rate. Interest rate is just an input factor to determining cash flow. If you had to refinance your existing loan but you could get a property that would double the cash flow of your portfolio would you do it? My guess is yes. Refinancing is a good option if after the refinance the cash flow is stronger with the two properties than just the one.
That makes total sense! So you think a cash out refi makes more sense than a heloc if it’ll take a few years to get the money back mainly for the fixed rate factor of a refi?
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
Quote from @Caitlin Stables:
Quote from @Conner Olsen:
Quote from @Caitlin Stables:
Quote from @Conner Olsen:
Quote from @Caitlin Stables:
We own our primary with an FHA loan currently and we should have about 80k or so in equity based on comps. Is there a better v best way to go about this? We ultimately want to own a few local STR's in the Richmond/Central Virginia area and this would be our first investment purchase. I am a local Realtor here so I have that leg up but as far as the funding and financing options go I am totally green. Any help would be appreciated!!
I would use a HELOC if you can get your money back in 18 months. Also I run the numbers on a HELOC 4% above todays rates and make sure the property still cash flows. If I can check both of those boxes I do it. If not, second lien or cash out refi might be better.
With a cash out refi tho we’d lose the 2.5% rate we currently have…a second lien is just like a second mortgage? I’ve been offered really good terms as I mentioned above for a heloc but you make some good points in just being extra conservative adding interest on top of todays rates
Totally understand, the interest rate is enticing to keep. What is more important to you, the interest rate of a property or the cash flow of the portfolio? Personally cash flow matters more to me than interest rate. Interest rate is just an input factor to determining cash flow. If you had to refinance your existing loan but you could get a property that would double the cash flow of your portfolio would you do it? My guess is yes. Refinancing is a good option if after the refinance the cash flow is stronger with the two properties than just the one.
That makes total sense! So you think a cash out refi makes more sense than a heloc if it’ll take a few years to get the money back mainly for the fixed rate factor of a refi?
Yes I do. I don't like variable interest rate debt on a long-term buy and hold. Would you rather get an auto loan on a new car or put the whole thing on a credit card?
Also listen to the BP Episode 720, David goes in detail on how to think about a refinance in a great way. Basically he says if you pull out $100k on a cash out refi and your payment goes up by $8k/year, can you find a place for $100k to earn you more than the 8% return? If yes, do the cash out refi if not then don't. I ran the calculation on my property (2.75% interest rate) and I'd need to get an 18% return on $150k to make up for the difference so it doesn't make sense for me. The point David makes in the episode is don't think that refinancing to a higher rate is bad so you shouldn't do it, take the analytical approach and see what you need to make in a return and then look at your options. There's more to it thank just thinking 2.75% = good, 7% = bad.
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