Cash out refinance or heloc?

28 Replies

Looking to purchase my first duplex. I want to do HELOC with my house to purchase the rental. Then refinance in a year to pay the loan off. My mortgage company and my mortgage broker said it would be better to do a cash out refinance. Is anyone familiar with this? Would it still work to refinance down the road and be able to purchase another property? Either way I'm trying to purchase as many properties as possible, just not sure what the right decision is. Any input helps thanks.

Yes I do cash out refinances all the time. Also my loan officer told me that banks prefer loans instead of lines of credit. 

And rates are at an all time low, best to lock in the rate.  After you buy the 2nd property, you would get another cash out loan to buy the next. And so on.

I don't quite understand a cash out refi. Doesn't that make your mortgage larger and then you're taking on more debt? @Jhanel Wilson - Can you share how you do it all the time? I've been dying to buy an investment property but my income is too low to qualify. I have a really high credit score, no debt except one mortgage, decent savings for a downpayment. I've owned my Brooklyn apartment for 10 years and the value has increased by about %25, possibly more. 

@Matthew Franklin

I guess this depends....  kinda weird honestly as there have been a few discussion posts about delayed financing --- bp topics always come in groups...

First, is there enough from your heloc to purchase the duplex in cash?  if so, you won't have a loan encumbering the property so its not really a "cash out refinance."  You are just financing/refinacing your home...  There is no "cash-out" feature.  

I am curious why do you want to wait a year?  seasoning?  you think values will go up in a year?

You can do a delayed financing approach.  Here is one thread about it.

https://www.biggerpockets.com/...

Since its a conforming loan, there is little "risk" to it nor extra fees to my knowledge.  You don't have to do anything special.  Close in cash, then within 6 months get a loan based on the purchase price of the property.  Unless you are purchasing under or well under market value, this seems like a good way to go.  Also, rates are still low.

So, other than terminology, what you proposed in your original post and what you said your broker proposed sound like the same thing to me.  What am I missing?

@Michelle Verdugo

It sounds like you got it.

A refinance it taking an existing mortgage and "replacing" it with another mortgage for the same principal amount, the amount that is outstanding/owed.  Of course, the idea is to get a better rate..

A cash-out refinance is taking an existing mortgage and replacing it with another mortgage of a larger principal amount.  Yes, the whole idea is to increase your debt, i.e. your leverage.  This can be a very powerful way to tap into your equity.  For example, nowadays with properties being sold at $10k's over asking, your home's market value could easily be $100k more than it was last year.  If you cash-out refi, you could get say another $75k in cash in your hand for say  an additional $325/mo (I'm ball parking numbers in my head here with idealized numbers since there are lots of variations...).  Actually, depending on the current rate of your mortgage, your payment may not even change!!  huh... think about that...

But, as you mentioned, if you don't have the income to support the increased loan amount at the available terms, then you don't qualify and this isn't an option for you.  Sorry to say, this is 'investing' afterall.  you need money/income to make money.. 

I hope this clarifies how this works.  Good luck.

If you do not have a HELOC already there may be difficulty finding a bank right now to do them. I was looking around and many banks have closed down the HELOC lines due to the current loan atmosphere. Many are doing refis and cash outs on primaries. You do have to qualify if you do it though. I agree with the low rates this would be the best move if it were me. It is frozen long term in case anything happens and it may be less interest than you are paying now on your current loan.

@Matthew Franklin

I did a cash out refi on my primary 3 years ago to pull 100k out to play with. I bought 3 SFHs with 20% down on each. They were worth a combined 350k when I bought them. They are worth 550k now. I have no regrets at all. I basically doubled my 100k I took out in less than 4 years. And have 3 good cash flowing properties. The interest rate on my primary is only 2.125% and my 3 rentals are at 2.75%. I’m all about borrowing cheap money! Good luck!

Originally posted by @Matthew Franklin :

Thank you for all the replies!

@David M. I just put a time frame out there for the refinance. From what I read it could be different depending on the lender. But since you brought it up. Is it better to buy the property out right? Or like @John Morgan said purchase as many as I can with 20% down? Thanks again everyone!

I purchased three properties out right (130k, 60k and 48k through creative financing). I paid 130k cash for my first property and was only making 6% cash on cash after all my expenses. That was terrible. So I did a cash out refi on it a few years later and got all my money back since it appreciated well. I got 140k cash back to play with. Might as well use all that equity just sitting there doing nothing for me. So I bought a SFH fixer upper with that cash and tried my first BRRRR. Then did a cash out refi on that one to repeat and do another BRRRR. Then another BRRRR with the recycled $. Although I haven't done the cash out refi part on the 3rd BRRRR, it's nice to have it paid off.

I have also bought 4 SFHs with 20% down. My cash on cash ROI with those is insane, if you calculate monthly cash flow, principal pay down each month on the mortgage and appreciation. With only 5% appreciation factored in (to be conservative), my ROI on my 20% down payments is around 80% on all my properties. Each year! It's insane. Properties in my area have been appreciating over 10-15% the last few years so my CoC return on those 20% down payments is over 100% each year. So I'm basically getting all my down payment $ on each house back in just one year! And after one year, it's all gravy. It might be in the form of equity in the house, but it's still equity and increases my net worth. And the monthly cashflow is basically tax free! These 15 year mortgages are dwindling down fast and if it appreciates at least 5%/year I'm doing cart wheels and back flips as I watch my properties go up in value. Oh and market rent has been going way up too! So I could have 3 or 4 paid off properties with a low CoC return, or 10 with a little leverage. Sorry Dave Ramsey, I'll take the 10 and leverage myself to wealth while my tenants pay these mortgages off for me,

 

@Matthew Franklin

Well, it all depends on your investment strategy and goals.  With increased leverage, you can scale to more properties.  But, what if you don't need or want it?  Is two properties free and clear generating enough cash flow for you?  Or would you like say 5 encumbered properties that will be free and clear in 30 years?  To put it mildly bluntly, in 30 years do you see yourself starting or middle of retirement?  Or, in the grave?  "Older" investors are looking at cash flow, usually, because they are living off of it.  "Younger" investors can, not always, plan on appreciation and the principles of leverage because they have the the time.

So, it goes back to your investment strategy and goals and how much the "power of leverage" is worth to you.  Make sense?

@John Morgan when you get loans for your other properties do you tell them they aren't owner occupied or they don't ask? Or are this investment loans? Which is why I ask because those are nice interest rates for investment properties. I wasn't sure how people do it. On anything other than a primary residence do people just get Conventional 30 year loans and don't ask don't tell about whether they live in them or not? Because I thought those types of loans were reserved for primary residence.. I'm just curious if how everyone is doing these loans. Thanks

@Demon S Rogers

You need to declare your residency/occupation.  Conventional loans are the only conforming residential product for non-owner occupied.  They are sometimes called "investment conventional loans" to differentiate.  Usually, the interst rate is 1% to 1.25% point higher than your standard owner-occupied conventional.

I hope that clears things up.

@David M.

I understand that. But based on Morgan's post that is not the case? Or I can get a Conventional loan and not need to occupy it and it's traditional not a investment loan.... I would like clarity on the post more than my understanding because his interest was so low and he hasn't lived in them for that year that's usually required of a Conventional loan.. thanks

@Demon S Rogers

Oh, I read further up this time where he states he as the 2.125% and 2.75% loans.  Sounds like he got a really good deal, and may even had bought down the rate with points.  As I vaguely recall, 3 years ago the rate had dropped below 3%.  with a very short lock and cheap points, I'm guessing it could have been affordable to get a 2.125% loan on a primary....

Originally posted by @Demon S Rogers :

@John Morgan when you get loans for your other properties do you tell them they aren't owner occupied or they don't ask? Or are this investment loans? Which is why I ask because those are nice interest rates for investment properties. I wasn't sure how people do it. On anything other than a primary residence do people just get Conventional 30 year loans and don't ask don't tell about whether they live in them or not? Because I thought those types of loans were reserved for primary residence.. I'm just curious if how everyone is doing these loans. Thanks

The 2.125% is a 15 year loan on my primary which I had to pay 1 point for. Investment loan interest rates are higher, so that’s why I’m paying 2.75% on 6 of my loans, 3.75% on one and 4.125% on another one. I had to pay one point on all of them. 

 

If it is just a year term, for me it is a toss up. If you were holding the downpayment on the HELOC for more than a year or so, I would thing Cash Out is better. But if you think 1 year is doable, I think its fine either way.

Although, depending what your interest rate is now, maybe it is worth it to do a refinance anyway. 

@Matthew Franklin

He tried doing cash out refinance on primary home years back but my debt to income wouldn't allow for invest mortgage, Did a HELOC few months ago looking to pay all cash for property this time .

(My HELOC payment if use 110,000 is $325, varies on amount use and what the rates are for month )

@John Morgan I'm a mortgage underwriter. You will absolutely need to disclose that it's an investment property..it affects your rate, your Max LTV and your Max DTI. The application asks where you live currently, whether you own or rent, what the subject property address is and what the property intended use will be. Occupancy type is a big deal and trying to hide that it's an investment property will not go well. At best the lender will just refuse to make the loan. At worst we report it as attempted mortgage fraud. (It's not worth it.) The most common way to buy an investment property with a low rate is to either get a conventional mortgage (fannie / freddie) or if you have equity in your home you can take out a heloc on your home and use that to pay for the investment property. Often times people do a combo. The rates are so low right now that getting a conventional fixed mortgage on an investment property is probably the best way to go. That way it is fixed and not variable.

Originally posted by @Lynne Smith :

@John Morgan I'm a mortgage underwriter. You will absolutely need to disclose that it's an investment property..it affects your rate, your Max LTV and your Max DTI. The application asks where you live currently, whether you own or rent, what the subject property address is and what the property intended use will be. Occupancy type is a big deal and trying to hide that it's an investment property will not go well. At best the lender will just refuse to make the loan. At worst we report it as attempted mortgage fraud. (It's not worth it.) The most common way to buy an investment property with a low rate is to either get a conventional mortgage (fannie / freddie) or if you have equity in your home you can take out a heloc on your home and use that to pay for the investment property. Often times people do a combo. The rates are so low right now that getting a conventional fixed mortgage on an investment property is probably the best way to go. That way it is fixed and not variable.

I don’t know what you’re talking about. I’ve been in my primary home for 16 years and my lender knows it’s my primary. I’ve never rented it out.  I have 8 investment property loans and my bank knows each one is an investment loan. Maybe you think I’m lying to my bank because my interest rates are fairly low at 2.75% on 6 of them? I’m not hiding anything from my lender. I’m actually in the process of doing a cash out refi on a paid off rental. It’s in the under writing stage and they clearly know I have 10 rental properties. I’m not hiding anything so not sure why you think I am.