HELOC or cash out refi?

7 Replies

I’m debating between the two right now for my first property. I’m looking to get a little more aggressive with some investing and want to get some cash on hand. Some basic details: Value: 320k Owed: 80k Rent: 1350 Payment: 650 (incl. taxes and insurance) Should I get a HELOC or cash out refi? Either way I believe I’m looking at being around 25% down/equity and either getting 160k cash on hand or a 160k credit line. I want to keep the payments around 1250 so I can still minimally cash flow. I’d be doing the HELOC with PenFed, since they seem to be one of the few who will HELOC an investment property. For the refi I would probably shop around, although I’d be highly likely to use Guild Mortgage due to an existing good experience with them (they haven’t sold my loan yet, and that’s a personal pet peeve lol) Any strong opinions in one direction or the other? What kind of fees am I looking at for one over the other?

Updated about 3 years ago

Forgot to add one important detail. Current rate on my first mortgage is only 3.875% Clearly I won't be able to get anything close to that on a refi now.

@Jeff Dulla I have no concrete plans at the moment, so I don’t know how long it would take me to repay. HELOC rates would run me about 6-7% from what I’ve been seeing.

I’d probably be using the HELOC funds to either put a down payment on one or two additional properties, or possibly buy one or two properties cash outright in an overseas emerging market. Riskier I know, but also higher potential return.

If I really wanted to focus on paying the HELOCs back, I could probably do it in 2-3 years, but I’d probably want to extend it for as long as possible (so probably 10 years?) and use any cash for additional investing.

I will do HELOC all day long. Here is why:

Cash out refi will restart your mortgage.
If you pay off the cashed out amount, you can’t get it back. I can use HELOC to buy a property, pay it back within a year and then rinse and repeat for next property.
HELOC is like a credit card so interest is charged on the balance where as once you cash out money via refi, even if you don’t use that money, you will start paying interest.

@Martin L. I understand what Alpesh is saying but that doesn't sound like that is what you are doing. You are planning to hold the debt. So if you look at your weighted average, you are talking about a blended rate that is well into the mid 5's and subject to continue changing over even just the next year or so. Why wouldn't you cash-out, secure a 30 year fixed in the low to mid 5s and then hold it. It secures your blended rate below what your best case scenario for rates would be with the HELOC (and couldn't be farther from reality).

As for his point about your amortization starting all over again - it wouldnt matter if you are holding a HELOC for ten years and making those payments. Your amortization and proportion of interest on the HELOC would be completely outweighing much of the benefit he is talking about (especially since your HELOC is double what your current first lien is). If you were really worried about re-amortizing your current first lien, you could still cash-out and simply put extra towards the mortgage on a monthly basis. Especially the difference in how much extra you would be paying as your rate on the HELOC continues to rise above 7%.

Just my two cents. 

@Martin L. It is also untrue that if you don't use the proceeds from your cash-out that you are stuck paying interest on all of it. Most Prime loans these days do not carry prepayment penalties. Therefore any proceeds you do not use, you can simply apply back towards the principal balance, alleviating the extra interest you would have paid. 

You’ll need to check on the term limit with your lender on having an outstanding heloc for 10 years. They’ll likely term it out with you so you’re heloc won’t be a heloc anymore.

Regardless of that, I like the heloc method. It’s capital you can deploy at a moments notice when you find the right deal. If you got the right deal, you operate the property for a bit, make payments on the line and then get back to your lender and talk about refinancing the property into a term loan and now you’re heloc is available again.

Naturally it’s never that simple but that’s the premise of how I use my heloc.

Big question on the HELOC. Can I write a check directly from the HELOC to use as a down payment? What about proof of funds, seasoning, etc?

Or do I have to drop the funds into my account and season it? I've never used a HELOC to purchase a property before.