HELOC vs Cash Out Refinance?

Question

Hey guys,

In August 2018, I bought a primary residence that met my buying criteria for a BRRRR, but I bought it with a bank loan and they want me to live here for a year. After dealing with closing costs, now I know exactly why people get HML or Private Lenders to buy with cash & then refi into a bank loan.

Well, now I'm in a position where I am trying to pull out equity in my house.

Here are some details...

• Purchase Price - 57k
• Down Payment - 5%, Conventional
• Rehab Costs - 15k
• PITI + PMI - $518/m
• ARV - 105k
• Rental Estimate - $1000/m

It took me just over 1 month to get this rehabbed and moved in, now I'm playing the seasoning game!

I talked to my Lender and he said I would NOT be able to get a HELOC on the newly appraised value for 1 year.

He said I would be able to do a Cash out Refinance on the newly appraised value after 6 months.

I'm not sure if this is industry standard or just the lender I originally used. If I did a Cash out Refinance and they give 80% LTV, I'd be getting just under 30k back. I understand there's closing costs associated with this so it'd be a little less, but it's enough money to get another property.

With the HELOC, I would be able to keep my monthly payment (I think), but how much equity would I be able to access AND is the interest associated with it worth it?

Context - I'm in the suburbs of Detroit looking to do some more BRRRR deals partnering with either a private money lender, hard money lender, or just creatively funding my own deal with the money. I'm going to continue living here until I can rent it out & I know another property's cash flow would cover the added monthly mortgage I'd get from a REFI.

I'm curious what you guys would do here knowing a bit about my backstory!

John Warren · Answer

@Matthew John to my knowledge, cash out refinances normally take 6 months to accomplish, and you can typically go up to 80% LTV on the new appraised value. You will suffer a slightly worse rate than you currently have, and you will have to pay some closing costs again. These two items can really eat into your returns.

The advantages to the cash out refinance are that you get to lock in your debt long term, and you don't have any of the instability that comes with HELOCs (rate adjustments, notes called due, etc). Banks also love doing refinances, as they are pretty profitable.

The HELOC, on the other hand, allows you to keep the sweet deal you have on interest. Typically they cost nothing, or almost nothing in terms of closing costs. You can normally find lenders that will go to 90% LTV, but you can occasionally find one that goes a bit higher (I just got 100% LTV this week!).

The advantage to the HELOC is that it is much cheaper to access your money. You also can get interest only payments on it for a period in many cases, which always works out better in a spread sheet! Lastly, you keep your first position debt in place, which allows you to continue amortizing the primary note on schedule.

I like both products, and have used both products several times. I used a cash out refinance on one of my Berwyn properties that I was holding long term. I have used a HELOC on my personal residence, which gives me access to capital. They are both good tools!

John Warren · Answer

@Matthew John you most definitely do not need to wait a year! You should call a few lenders in the area. Reach out to other local investors and see what kind of contacts they can give you. Honestly, either the cash out or the HELOC will work out ok. Don't stress out too much on which direction to go. I like the HELOC since you don't loose the good initial interest rate on your loan, but either one gives you access to capital.

Matthew John · Answer

@John Warren Thanks for the detailed reply! Congrats on getting 100% LTV. Sounds like I should definitely shop around.

You don't have to go through the same lender for either Refinance or HELOC?

Are you only able to get a HELOC on the primary residence?

I'm just struggling on which one is best for my scenario of wanting to use it to buy more houses in my local market. My lender said HELOC I would have to wait 1 year (which is another 8-9 months for me) in order to go off the newly appraised value of the house.