Buying investment property through Heloc or conversational loan?

Question

Hello everyone,

Have built line of credit on my primary house. Though I haven’t open any Heloc account yet but I will.  I am planning to buy a rental property upto 200k.

have two options

1- Borrow 75% amount through Heloc and rest from saving account.

2- Finance the property with higher internet rate ( still less than current Heloc rate )  and rest 25% down payment from saving.

(We still have some funds reserve for emergency)

Here is my opinion:

Pros with 1st option:

Open Heloc and buy house, save the closing cost and refinance the 2nd mortgage when interest goes down in the future.

However the cons is,  in the couple of month if I have to buy another property , I have to pay off my Heloc first in order to buy another property from Heloc. I won’t be able use conventional loan. Also don’t think I would have enough equity built on the the rental property.

also if I want to do any upgrade before renting, I would not have enough fund for upgrade.

let’s go with 2nd option.cons first.

Though I am paying closing cost upfront. But if I have to refinance in the future I have to pay closing cost again only appraisal fee if I stick with same lender.. So for refinancing I am paying appraisal.

But ultimately I am paying closing cost two times. .

Pros:

if I have to invest in another rental property, I can still use my home equity line of credit to buy another rental property as quick as possible.
also by conventional loan, I can draw some fund from home equity for any upgrade on the rental property.

thought ?

Thanks

Vikas Panwar · Answer

Thanks for reply.

I am with 2nd option, as my currently lender wont charge any any closing fee except appraisal fee for refinancing on 1st rental property.

Thanks

Edward Zachary Samperio · Answer

Both options have their pros and cons, as you have mentioned. Option 1 may save you on closing costs, and the ability to refinance the 2nd mortgage when interest rates go down is a plus. However, it also limits your ability to use a conventional loan for another property in the future since you will have to pay off the HELOC first. Also, keep in mind that HELOCs tend to have variable interest rates, which means your payments may fluctuate based on market conditions.

Option 2 allows you to keep your HELOC available for future purchases and use a conventional loan for this rental property. However, you will likely have higher interest rates compared to a HELOC, and you will have to pay closing costs associated with the conventional loan.

Ultimately, the decision will depend on your individual circumstances and goals. If you are planning on purchasing another property in the near future, option 2 may be the better choice to keep your financing options open. However, if you are comfortable with the variable interest rate and want to save on closing costs, option 1 may be the way to go. It may be helpful to speak with a financial advisor or a mortgage specialist to help you make the best decision for your situation.