Real Estate Investor · Putnam Valley, NY · Member since 2015 · 9 posts · 0 votes
Home Equity Line of Created vs a new 1st Mortgage on my home.
A banker just suggested to me I might consider taking out a new 1st Mortage on our paid off home, rather than taking a Home Equity Line of Credit - to use to purchase Real Estate Investment Property. Because the rates will be better. However this also means I need to start paying interest on the whole lump some, vs only what I need at this time from the Home Equity.
I was wonder what other people's thoughts where on this?
@David Link - I have experience with both so I'll offer my two cents. For me, it all comes down to your anticipated use of the money -- what you plan on using it for and when.
A new first mortgage (cash out refi) is good if you know that you'll definitely need the money, and need it for a long time. (An example could be pulling the money out to buy a new long-term rental.) The benefits to this type of loan are that the rates are lower and they are locked in for a fixed period of time (i.e. 15 yrs or 30 yrs). The downsides could be that if you pull the money out and don't use it right away, you are still paying interest on it and on the entire amount. The initial costs to obtain this type of loan are also going to be higher than a HELOC.
On the other hand, a HELOC is good if you're not sure when/if you'll actually need the money, and you may only need it for a short period of time. (An example could be pulling the money out to buy a fix and flip that you anticipate selling.) The benefit to this type of loan is that you only pay interest on the amount that you actually use when you actually use it. The rates on this type of loan are also relatively low, and well under typical private money and hard money rates (though not quite as low as a new first mortgage). Also, the initial costs for this type of loan are going to be extremely low (zero dollars to a few hundred dollars has been my experience).
So, overall, it just depends on how/when you plan to use the money.
@Account Closed - Yes, both are going to ask for two years worth of tax returns.
@David Link - I have experience with both so I'll offer my two cents. For me, it all comes down to your anticipated use of the money -- what you plan on using it for and when.
A new first mortgage (cash out refi) is good if you know that you'll definitely need the money, and need it for a long time. (An example could be pulling the money out to buy a new long-term rental.) The benefits to this type of loan are that the rates are lower and they are locked in for a fixed period of time (i.e. 15 yrs or 30 yrs). The downsides could be that if you pull the money out and don't use it right away, you are still paying interest on it and on the entire amount. The initial costs to obtain this type of loan are also going to be higher than a HELOC.
On the other hand, a HELOC is good if you're not sure when/if you'll actually need the money, and you may only need it for a short period of time. (An example could be pulling the money out to buy a fix and flip that you anticipate selling.) The benefit to this type of loan is that you only pay interest on the amount that you actually use when you actually use it. The rates on this type of loan are also relatively low, and well under typical private money and hard money rates (though not quite as low as a new first mortgage). Also, the initial costs for this type of loan are going to be extremely low (zero dollars to a few hundred dollars has been my experience).
So, overall, it just depends on how/when you plan to use the money.
@Account Closed - Yes, both are going to ask for two years worth of tax returns.
i agree. My past experience with having a HELOC is i liked the flexibility is provided me. I was very mindful of the fact that i did not have a locked in 30 year mortgage and that made me a little uncomfortable so i always had a clear plan that if interests rates started moving around at all i would move for a refinance into fixed 30 year loan straight away. I was fairly confident interest rates would not double overnight so i knew i had time to react if i needed to.