I am trying to get out of my current primary home and use it as a rental. The area I live in is a great rental area. I can longterm or medium term it. I know it will cashflow well as my rate is very low. I want to hang on to this home for these reasons - it is a great cash-flowing rental opportunity. That being said, I need the equity in the home to get myself into a new primary (growing family).
I spoke with a mortgage broker and he recommended that I try to hold onto my rate by using a heloc instead of a cash out refi to put a down payment on my new primary. Numbers wise, it seems to make sense and my rent would cover the morgage and the heloc payments, but I am still struggling with the mental side of things. Is this stupid? Would I be over-leveraging my new primary? Seems like a risky play.
I keep thinking that it might be safer to sacrifice the rate by doing a cashout refi and then use that cash for my new downpayment.
Any thoughts would be appreciated. Don't hold back!
I have used helocs many a time, and in a similar situation to yours as well. You have to remember that the HELOC is not designed to be long-term financing, so just make a plan to pay it back after you buy the new primary residence.
Why a HELOC and not a DSCR refi? HELOCs usually at start have a fixed rate and then a variable rate. A DSCR refinance will allow you to do a refinance at a better rate usually than most investment properties, you can get a fixed rate DSCR, and you don't need personal income to qualify(usually property income and if it can pay for property expenses and credit).
DSCRs are usually about a 1% more in interest than regular residential loans(which is not bad for an investment property) and if you want you could buy down your rate if you want to and have the money, usually.
I would recommend you consider a DSCR refinance instead. With interest rates so high rate a DSCR seems a better alternative. That being said, this approach would work best when you have a tenant(either long term or medium term) in your current home you want to use as an investment property. For a cashout DSCR refinance, you will need to show proof of rental income.
I would say though that you whatever loan product you want(HELOC or DSCR cashout refinance), you should have the mortgage broker you are dealing with shop around and try to present you with the best offer out of the many bank/lenders he will be searching from.