Conventional Financing vs. Home Equity Loan/LOC

4 Replies

I was hoping someone could discuss the pros/cons of obtaining conventional financing for residential properties (SFR/duplexes) with 20% down, vs. if able, closing with 100% cash, then pulling out equity via a loan or HELOC.

I've done a lot of reading and research on the matter, however, I feel I'm missing out the part that only true experience can teach.  I've only ever used conventional financing, and this latest closing has been absolutely miserable with underwriters that are seeming to try every way under the sun to not have me hand them a big bag of money.  I was wondering if I should have just bought the house cash.  I'm trying to leverage as much as possible so as to establish cashflow with rentals.

Thank you!

@James Lim I think the biggest difference would be in closing costs. The HELOC has barely any closing costs compared to the conventional cash out ref. They are both valuable tools, and I have used both. I ran into problems last time I did a HELOC because the underwriters were not very sophisticated. They wanted to use the debt from my rental properties, but they weren't adding the rental income to my income line...

@John Warren Are rates typically similar between the two if you were to compare leaving 20% equity in the home?  Are there any other situations where you feel the conventional financing would have been beneficial?  Outside of suspect underwriting which I feel can be true of any situation?

@James Lim the rates will be a bit higher on HELOC's and the term is shorter (20 years on mine). I don't really care about that much because I don't plan to hold the loan open that long. I would pay it off and then use it again, etc.

If you want to hold the property for 30 years and lock in long term debt, the conventional might make more sense. It doesn't sound like that is the direction you are going though! If you are like me, you are constantly looking to make equity work. 

@James Lim Cash deal is always benefit to all the related parties but as buyer if its makes sense to pay double closing cost and getting lower purchase price ----if yes cash will help you as buyer. You can't run far with your own cash eventually you have to take HML, conventional loan or any type of financing. You need good lender who can prepare your ahead of time---you will get some of conditions but will be prepared ahead of time.