Refinance vs HELOC? which one and why?

Question

Hi everyone. My names is Andrea and looking to see what people are currently doing in regards to pulling your money out to move on to the next property. Just did a rehab I already on a property that has 2 homes in one lot and I am debating if I should do a HELOC or a refinance since interest rates are going up and will continue to go up with in the next months. Looking to get the max LVT possible.

Also interested to get leads on financial institutions which you have use for either refinance or HELOC. What LTV did you get? Also open to other options , if there's any

Thanks in advance .
Andrea

Also interested to get leads on financial institutions which  you have use for either refinance or HELOC. What LTV did you get? Also open to other options , if there's any

Thanks in advance .Andrea

Andrew Postell · Answer

@Andrea Ochoa as you mentioned FINDING a lender that offers a Line of Credit on a property such as yours might be a challenge.  I would certainly attend some local real estate groups in your area.  As in, go to the meetings in person and meet other investors and see who they are using.  The best lenders will be local lenders.  I guess there's always an exception but 99% of the time go local.

Now, as far as which product is better? To me there's a couple of main points of difference between the two:

1. Lines of Credit have low costs

2. Mortgages are fixed Rates

What this means is that a Line of Credit (LOC) is NOT designed to be a permanent financing solution. Two of the common areas of concern for LOCs I see out there is the 10 year maturity date and the adjustable rate. Since LOCs have adjustable rates they will often catch people off guard when they adjust. Rates are somewhat low now...but what will they be in 5 years?, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

However, if you use it to say....buy another property.  Then flip that property...thus paying back your Line of Credit.  Then that's perfect!  Because you will never get surprised by an adjusting rate or keeping a balance on it.  Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

You buy your next property with a cash offer (that already sounds good to the seller) then you refinance the NEW property into a 30 year loan, and pay back the LOC and keep using it over and over. That is, if you had enough equity to get a LOC big enough to do that type of thing.

You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!