Home equity loan/credit or refinance ?

Question

Im just starting out and was wondering what is better between refinancing and getting a home equity loan the pros and cons of each and in detail would help a lot thanks !

Forrest Faulconer · Answer

Hey Antony! I just went through this process. At first I was planning on getting a HELOC on my house, it was locked in a 15 year loan, with 8 years left at 3.875% and $43,500 left on the mortgage. I could have got a HELOC credit for around $60,000, I would spend it as I needed it and pay it down to retain the equity in my home. Here is why I did not decide to go that route and instead went with a cash-out refinance.

1.) The HELOC interest rate was interest only for 12 months, but at around 5-5.5%. That means, if I wanted to use that HELOC as a down payment on a house, I would be stuck paying interest at an average interest rate on the down payment ON TOP OF paying the new loan on the investment property. I found it very difficult to make the numbers work for many scenarios.

2.) The interest rates are so low that I was able to cash-out refi at 2.99%, I went with a 30 year amortization and ended up lowering my monthly payment by $120. I pulled about $62,000 out of the house.

3.) Although my new loan amortization has restarted and has a greater balance, my monthly payment is less and however I end up investing that cash, I will be getting an infinite-fold return compared to it sitting as equity in the home. Look up: Return on Equity.

Therefore, look at your options and long-term goals and make the best move for you. Transactions costs are higher with a refinance compared to a HELOC, but to me it was worth the investment.

Forrest Faulconer

Forrest Faulconer · Answer

@Antony Charlier

I would use a HELOC when you don’t want to go through the process of refinancing your house, but still want to tap into the equity. Numbers don’t lie, run your numbers on getting a HELOC set up vs refinancing, the payments or your mortgage before and after, and the interest payments of your HELOC. If you can use your HELOC and pay it down before interests hits you’ll be in a good spot, but it just wasn’t for me.

Kevin Young · Answer

@Antony Charlier

It’s going to cost you money via closing costs to do a refi. Say it costs you $5,000 to do the refi and the refi itself will save you $300 a month. Then it’s going to take you about 16 months to (5000 / 300 = 16.6) “break even”. After the break even is when you start benefiting from the refi in terms of total savings and not just more cash flow each month. Does that make sense?

Antony Charlier · Answer

@Forrest Faulconer okay thanks a lot!

Antony Charlier · Answer

@Forrest Faulconer thanks a lot that was real detailed and really helpful appreciate it!

Kevin Young · Answer

@Antony Charlie

Awesome man. Good luck.

Antony Charlier · Answer

@Kevin Young yeah that’s a lot better just had to see numbers with it appreciate it!

Antony Charlier · Answer

@Kevin Young sorry can you explain a little when u say break even I don’t think I get it.

Kevin Young · Answer

@Antony Charlier

Make sure you know what the break even point is on the refi. It sounds good to be getting a lower interest rate and increasing your monthly cash flow but if you plan on selling in the near-ish future just make sure you know how long it will take to break even on the fees etc... of the refi.

Antony Charlier · Answer

@Forrest Faulconer no doubt! One more quick question sorry i just thought of it so when would it be a good time to use a HELOC

Home equity loan/credit or refinance ?

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