Refinance or HELOC/HEL advice

2 Replies

Hello,

I posted a question similar to this in the past but can't seem to find. Here is my current situation...

I have approx $100k in equity in my primary residence. I recently purchased two investment properties, both with 20% down payments (totaling around $100k) which used up essentially all of my available funds. I am looking to purchase more rental properties, but do not have any cash available for a down payment.

I am undecided as to what would be the best course of action to take. Should I take out a HELOC or HEL on my primary residence, and use the funds from that to make a down payment on additional properties and then obtain a conventional mortgage on them? Or would a cash out refinance make more sense?

Any help would be appreciated!

-Spencer

@Spencer Harvey I know people have reasons for why they prefer a HELOC but I tend to stay away. I have seen people post that the only reason lenders on here don't support HELOCs is that they don't get paid to do them (which is actually inaccurate). Speaking just as an investor, I still would shy away from a HELOC for the simple fact that I am not certain how quickly I could pay it off/down.

HELOCs are based on Prime Rate plus a margin. Prime rate is a tool the Fed manipulates based on their forecast for inflation and where it is headed. It can change over time and the Fed has stated they still have intended increases to Prime rate planned for the next year or so. Long story short, your HELOC is going to carry a 6%+ interest rate to start with and most likely will climb from there. Not the most stable instrument for a longer term hold.

I would ask what your current interest rate is on your first mortgage. If it is really low, I would take a look at the aggregate cost of your debt once adding the HELOC. Depending on where your proposed aggregate rate falls, it may be a no brainer to refinance and fix your rate in. You also need to be very honest with yourself and how long you think it would take you to payoff a HELOC. Forecast out Prime rate and see if you have a contingency plan for what you would do if rates go to 8%,9%,10%.

If you're planning to use money for down payment on more rentals, HELOC might be better.

You use money when you're buying properties, Tenants payment pay down the debt and you can use it again.

With the loan, you'll take all the money at once and despite of not using them, they all incurred the interest.

Besides, it doesn't make sense to pay them down because you can't take money back until you refinance.

HELOCis the best tool to get as much money as you want and when you need them.

Interest will be tax deductible if you keep track that you spent it on the investment properties.