Cash out or HELOC on rental property?

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Cash out or HELOC on rental property?

Vlad Maslov
Rehoboth Beach, DE · Member since 2018 · 4 posts · 0 votes

Hi everyone! What a great community! I am a first time poster newbie real estate investor form Delaware. 

We have one small 2 bed 1 bath rental house that used to be our primary residence, but now we are renting it out. It's worth around $140k(according to zillow) and we own $18k on 10year 3.5% note. Rent is $950, mortgage $512(taxes and insurance included) So, there is a good chunk of equity in that property. Our primary house is a fixer upper that I have been fixing little by little myself and over time that run into 25k credit card debt. I am not paying any interest on that $25k just yet, and recently been able to transfer it to another credit card with 0% APR for another year, didn't pay any transaction fee. Even though I am not paying interest on that $25k, but, just knowing that it is there makes me feel "uncomfortable" and I still need around $10-15k to finish renovation.

In short, goals:

1) pay off $25k credit cards balance

2) get some reserves around $10-15k(for materials) to finish renovation primary

3) if anything left, maybe get some cash for down payment for another rental property 

So I am trying to choose between Cash Out refi vs HELOC

I found two local banks that offer HELOCS on investment property. 70%LTV prime+2%(2.25%), got to pay $500-1500 closing fees.

Same banks offer cash out refi for rental properties: 75%LTV, 5.5-6% 30 year fixed, 3000-4500 closing fees

Seems like, if I go refi I can pull out around $83k ($105k(new loan) - $18k(current mortgage) - $4k(closing fee)=$83k

$83k - $25k(credit cards) - $15k(to finish rehab) = $43k (for next investment).

I am still researching and shopping around for other options, but refi seems to be a better option for right now. 

What would you do/recommend in this situation? Thanks

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
8y

@Vlad Maslov two of the common areas of concern for LOCs I see out there is the 10 year maturity date and the adjustable rate. Since most LOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

If you are looking to keep this property for a long time then go with a fixed rate.  That's the smarter move on long term outlooks.

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    8y

    @Vlad Maslov two of the common areas of concern for LOCs I see out there is the 10 year maturity date and the adjustable rate. Since most LOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

    If you are looking to keep this property for a long time then go with a fixed rate.  That's the smarter move on long term outlooks.

    2Reply
  • Account Closed
    Member since 2018 · 70 posts · 89 votes
    8y

    RE HELOCs, there's a ton of info on the internet about how people use these to pay down debt quickly. It basically works out to you using the HELOC as your primary account and having all of your money go into paying down the account while you draw from the account when you need money in your checking account to pay bills. This helps to further reduce interest and the thought of having to pull money out (borrowing more) is said to have a dissuading effect on people and the tend to become a bit more frugal.

    If you're interested just google it and there's tons of info out there on the process. I've not done it and my one criticism is the risk of interest rate increases, but if you're contemplating a HELOC anyway, you should probably read up on this a little bit as it may save you even more money.

    1Reply
  • Scott Hensley
    Rental Property Investor · Jacksonville FL Honolulu, HI · Member since 2017 · 50 posts · 20 votes
    8y
    Vlad, As was mentioned before, do your homework to understand how the LOC works and assess your longer term goals. The LOC can be useful (I just opened one myself) to find deals. It can get people in trouble due to the adjustable rate. If you plan on using it to pay off debt and then take years to pay it off then it might not be the best option since interest rates are likely to go up and you will already be paying 7%+ from the start. Think of the LOC like a hard money loan except you are lending to yourself. It is best if used and payed off in a shorter period, rather than holding debt for years. Another option you have is to take out a traditional loan for what is needed to payoff your debt then open a LOC on the remaining equity. This would allow you to have access to quick, short term money without holding $50k in the bank. Another benefit of the LOC is the revolving credit, same as the credit card, which allows you to reuse the money as soon as you pay it off. There are a lot of options for you and having that much equity is certainly a leg up. Take your time, understand your options, shop around for the best loans, and decide what fits your goals the best.
    1Reply
  • Vlad Maslov
    OP
    Rehoboth Beach, DE · Member since 2018 · 4 posts · 0 votes
    8y
    Originally posted by @Andrew Postell:

    @Vlad Maslov two of the common areas of concern for LOCs I see out there is the 10 year maturity date and the adjustable rate. Since most LOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

    If you are looking to keep this property for a long time then go with a fixed rate.  That's the smarter move on long term outlooks.

     Andrew,

    Thanks for your reply. The adjustable rate is what makes me worry about HELOC. And yes I am planing to hold that rental for as long as I can, so fixed rate makes more sense.

    0Reply
  • Vlad Maslov
    OP
    Rehoboth Beach, DE · Member since 2018 · 4 posts · 0 votes
    8y
    Originally posted by @Account Closed:

    RE HELOCs, there's a ton of info on the internet about how people use these to pay down debt quickly. It basically works out to you using the HELOC as your primary account and having all of your money go into paying down the account while you draw from the account when you need money in your checking account to pay bills. This helps to further reduce interest and the thought of having to pull money out (borrowing more) is said to have a dissuading effect on people and the tend to become a bit more frugal.

    If you're interested just google it and there's tons of info out there on the process. I've not done it and my one criticism is the risk of interest rate increases, but if you're contemplating a HELOC anyway, you should probably read up on this a little bit as it may save you even more money.

    I am aware of that strategy, but don't know all the details, actually may be a good idea. I will consider that option . Thanks, Tom

    0Reply
  • Vlad Maslov
    OP
    Rehoboth Beach, DE · Member since 2018 · 4 posts · 0 votes
    8y
    Originally posted by @Scott Hensley:

    Another option you have is to take out a traditional loan for what is needed to payoff your debt then open a LOC on the remaining equity. This would allow you to have access to quick, short term money without holding $50k in the bank. Another benefit of the LOC is the revolving credit, same as the credit card, which allows you to reuse the money as soon as you pay it off.

    There are a lot of options for you and having that much equity is certainly a leg up. Take your time, understand your options, shop around for the best loans, and decide what fits your goals the best.

     Wow. I never thought about combining both, I really like that option. I have an appointment with one local lender tomorrow and will ask if I can get $40k cash out, and another $30-40 on heloc. Thanks alot!!!  

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