Investor · Member since 2013 · 56 posts · 52 votes
If you had equity in your rentals and wanted to leverage that to purchase new rentals, given today's market, would you do HELOC or cash out refi for down payment on new properties?
Agree with @Alex Olson that a HELOC offers better flexibility. I've used my HELOC on my primary residence to purchase rentals in cash. BRRRR strategy. Once they are stabilized with a tenant and seasoned, I do a cash-out refi on the rental and pay back my HELOC, thereby recycling the capital.
If you had equity in your rentals and wanted to leverage that to purchase new rentals, given today's market, would you do HELOC or cash out refi for down payment on new properties?
A line of credit is a better option as you only pay interest on what you use. And as you pay it back you can use it again. A refi is just a lump sum. It is still good and good but like having a bit more control of my money.
Agree with @Alex Olson that a HELOC offers better flexibility. I've used my HELOC on my primary residence to purchase rentals in cash. BRRRR strategy. Once they are stabilized with a tenant and seasoned, I do a cash-out refi on the rental and pay back my HELOC, thereby recycling the capital.
@Tim Kaminski, Only pay interest on what you use... Meaning, if the HELOC is approved up to $100,000 and you only need to draw $80,000 of credit, you only pay interest on the $80,000. You pay principal plus interest on the $80,000. The $20,000 that was approved but never used is never subject to any interest payments.
@Azita S., I just cashed out my equity on a rental and locked in a low 30 year rate. Less flexibility, yes, but I wanted the more certainty of a long term low interest rate.
@Azita S., I used PenFed to get my last HELOC. Each lender has a different set of parameters for these loans. Typically, they are interest-only for the first 10 years and then convert to a principal and interest loan. Some may start out adjustable, but others are fixed for the first few years and then adjust later. To complicate matters, some lenders use a full appraisal while others use desktop underwriting to get their value. I had a house I renovated and wanted the lender to add value for the finish we used, and they wouldn’t; they wanted the value that the desktop underwriting provided. While another time, I wasn’t done with the inside and didn’t want to show them the incomplete repairs, and desktop valuation worked well. Call and tell the loan officer what you are looking for (HELOC) and ask for the term, the rate and whether interest only, given the FICO you provide. When you find the right lender, allow them to pull credit, so you don’t get a ton of inquiries on your credit.
@Paul Shannon my only concern is interest rates going up
Its good that you are considering interest rate risk. Rates will have to go up at some point in time. However, in the medium-term I don't see that as a threat given the economic situation we are in. The only catalyst to rates rising fast is if the US decided to stop paying its debt, but that would have dire consequences to the dollar.
Otherwise, it will be a slow rise sometime in the future. Most HELOCs will cap the amount that your rates can increase in any given year.
If you use your HELOC as short-term funds to acquire and cash-out refi when your done with your project, you are only using the funds you need and with a short-term horizon in mind. You can always run your numbers assuming a 2 percent higher rate as well and make sure they still work. Build in a buffer.
Outside of just real estate, HELOCs are nice to have for emergency or rainy day funds. If I ever got in a pinch, I feel comfortable to know that I can tap my homes equity at 3.75% (current rate) versus using credit card debt at 18%+.