HELOC vs HE Loan vs Cash-Out Refi

11 Replies

BP community!

Reaching out with a question about best options for financing.  

Working to find a house-hack duplex in Austin, TX and planning to go conventional with 15% down.  I am considering leveraging our primary home to do so.  It is currently on a 15 year note and if I have about $45,000 in equity sitting in it.  What are the pros and cons of each of the below three methods for accessing this?

1. Cash out Refinance: 

PRO: Keeps everything together (HELOC and HEL create a 2nd lien)

CON: Starts a new loan, so has closing costs and you go back to the beginning of the amortization table, so more money to the bank.

2. HELOC

PRO: Low monthly payments.  Avoid closing costs. Keep my current 1st loan on 15 year term chugging along.

CON: Might take a long time to pay it back and unless the duplex can later be refinanced at a higher value, it will be harder to put this money back.

3. HE Loan

PRO: Fixed term and interest rate.  Avoid closing costs. Keep my current 1st loan on 15 year term chugging along.

CON:  Creates a 2nd lien with a higher payment, so always risky if payment gets tough.

Open to your feedback.

Thanks!

Daniel

1) You can ask your lender to keep the same amortization table.  You don't have to add those years in your mortgage payment. 

2 & 3) will make your DTI higher with 15 years amortization period. So your buying power will be lower if you want to add more properties in your investments near future.

I read somewhere that with the new tax plan you can't write off the interest of a HELOC. I am not sure of the exact details, but this might be something to consider as a con versus a cash out refinance.

If you are moving into the new property, is there a reason to keep your old property? If you can take advantage of section 121 for tax free gains, could that cash be deployed more effectively elsewhere? SFRs generally don't make great rentals in Austin, so unless you are banking on some appreciation in your current home that you couldn't get from another investment, I would consider selling.

I'd also factor in the reality that the Fed will be raising rates several times this year, which will directly impact the rate you pay on any floating rate debt instrument tied to prime (your HELOC specifically). Currently prime is 4.50%, but that could easily be 5.25% by Q3, meaning more of your monthly payment would be going towards interest. Just something to consider. I'm currently in the process of closing out my HELOC / LOC's and refinancing my rentals into 30yr fixed mortgages because the increase in rates could easily make my floating HELOC / LOC payments basically the same as the P&I on a 30yr fixed.

I went heloc.  Checkbook access and simplicity, only paying interest on what I am using at that time.   I used mine for down $ and rehab... made my life very easy.

Thank you all for this useful feedback.  

I think I have ruled out the HELOC based on likelihood of rate increases and not being able to write off the interest under new tax plan. The HE Loan also may not allow for write-offs, but at least it's a fixed rate and term. Also, since the duplex I am offering on does not need massive improvements, there is not much room for me to refi the duplex soon and pay back a 2nd lien. Therefore, I would be paying it off from W-2 income, and doing so on a fixed term makes it less volatile.

My top choice is probably to refinance the home I am exiting.  However, I am not sure if I will be able to do this AT THE SAME TIME as I take the new loan for the duplex? 

In another post, Zack Karp told me that the above was possible, but it would need to be a rockstar loan officer.  Does anyone how this works?

@Harjeet Bhatti   Can you please explain your comment of "you can ask your lender to keep the same amortization table. You don't have to add those years in your mortgage payment."   

-Do I have to stay with the same lender to do this? (I am considering refinancing with a different broker)

-If I "keep the same table" then I just start from where I left off?  So, I am on year 4 of a 15 year note, does that mean I would go to year 4 of a new 15 or 30 year note?

@Kris Wong Thanks for suggesting the idea of selling the home. However, given the appreciation I have seen in the last few years and the development going on in my area, I expect it to continue appreciating. Also, since I am already 4 years into a 15 year loan I could see renting it until it's paid off. On current loan it would basically break even. Or, if I refi it to a 30-year it will then cash flow after expenses and, most importantly, allows for future leverage/HELOC as I plan for future investments. Please correct me if my logic is off!

It sounds like you have thought this through. I just wanted to make sure you had considered whether your capital were better invested elsewhere. I am a big fan of "trading up", when the situation allows for it. You will also lose your section 121 benefits after a few years of renting the home.

As for closing both loans around the same time, I don't see why that would be any issue.  I recently completed a refi on a duplex, and within a couple weeks closed 3 new mortgages all on the same day. I also had a commercial loan in progress at the same time. You just need to ensure your D/I ratio allows you to carry both properties, since you will likely not have a signed lease at the time of closing, and that you have enough liquidity to make the lender comfortable. Also keep in mind you will pay a higher rate on the refi since it will no longer be your primary residence.

HELOC every single time for many, many reasons. Buy right, pay down your HELOC as best you can for a year or two, force some equity and refi asap, pay off your HELOC with the proceeds and do it all over again.

@Daniel Jackson No you don't have to stay with same lender. Some lenders can offer you different amortization table.

Just a word of caution - given the frothiness of the market, what if you don't build equity in the property immediately and can't refi to repay the HELOC?


I'm only posing this question, because I've seen many people talking about leverage quite a bit, assuming a certain percentage of immediate to mid-term equity will be realized. 

I'm going through the same strategic thought process right now to decide if and how I would finance opportunities at this time. 

Thanks for sharing.

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