Refinance vs HELOC vs Hard money lender to finance first flip
Member since 2018 · 2 posts · 0 votes
I have the option of refinancing my first investment house vs a HELOC on the same house vs getting a hard money loan to finance my first flip. I am leaning towards going with the refinance because it offers the lowest rate and overall cost, but I'm afraid to place my home in harms way in case something goes wrong. I understand that it is a gamble and that if I use all the right tools and do my homework, I will minimize my risk and will be successful. Any thought or suggestions.
Thank you
Igor
@amanda casto ... If it is only short term, why not go with the HELOC, as long as you only pay for what you draw (only option where you don't have to pay interest on the entire balance up front, and is interest only, allowing you minimal payments until you finalize and sell the flip, providing for the biggest cash flow of all the options.
A refi, you will probably end up paying for the total amount from day one, plus be stuck paying interest AND principle, and also the same costs that you would pay for anyways with a HELOC, but have less flexibility than a HELOC offers.
A hard money loan, even if it is in the 10's, you are only paying an actual, monthly interest rate of about .83% on the total (what will your timeline be?). If it will take six months, you will end up paying 4.98% interest on the total amount (.83*6 months).
If it was me, I would and DO use the HELOC, because it offers the most flexibility for deals now and (if it is a revolving line), eliminates the need in applying for future funding down the line (some people will say that the adjustable rates can get you. However, not having funding for a deal, immediately, can also get you.) Also, usually the introductory rates are pretty solid (first year or so).
@amanda casto ... If it is only short term, why not go with the HELOC, as long as you only pay for what you draw (only option where you don't have to pay interest on the entire balance up front, and is interest only, allowing you minimal payments until you finalize and sell the flip, providing for the biggest cash flow of all the options.
A refi, you will probably end up paying for the total amount from day one, plus be stuck paying interest AND principle, and also the same costs that you would pay for anyways with a HELOC, but have less flexibility than a HELOC offers.
A hard money loan, even if it is in the 10's, you are only paying an actual, monthly interest rate of about .83% on the total (what will your timeline be?). If it will take six months, you will end up paying 4.98% interest on the total amount (.83*6 months).
If it was me, I would and DO use the HELOC, because it offers the most flexibility for deals now and (if it is a revolving line), eliminates the need in applying for future funding down the line (some people will say that the adjustable rates can get you. However, not having funding for a deal, immediately, can also get you.) Also, usually the introductory rates are pretty solid (first year or so).
I'm not sure I have the question nailed down correctly? Is this home a investment home for you or is in your owner occupied home? It will make a difference is a couple of cases that you have laid out here.
If its and investment home and you want to do a HELOC, you may find it difficult to find a lender that will do this kind of loan. The vast majority of lenders wont do a HELOC on an investment property. The best lender I have found for this is Pen Fed credit union to 80% max so long as you have 4 properties or less?
If its an owner occupied home and you want to do a hard money loan on the property, most hard money lenders will not loan to an owner occupied due to the laws. There are some Non-QM or portfolio lenders, but they typically don't do rehabs, so will the property pass an appraisal in its as is condition? There are fix and flip loans as well, but typically they wont do owner occupied homes due to the laws as well.
If it is owner occupied and it can pass the appraisal in its as is condition, then yes, I recommend the HELOC. its less costly, you get the money without any oversight from the lender and its a much easier and quicker loan to get done.
If its non-owner and it will pass the appraisal, I would call Pen Fed on their HELOC. If it wont pass the appraisal, then I would do a fix and flip loan with a lender that allows you to do the work, assuming you plan to do that?
I hope this helps?
Thank you both for the feedback! Looking back on our post, we should have been more clear.
We own a single family house in FL, in which we live. We also own a duplex in Charleston, SC which has been income generating for several years now, with both units rented.
We have mortgages on both properties and were looking into using a HELOC on the South Carolina duplex as means of financing a fix-and-flip investment opportunity here in Tampa Bay.
We (to clarify "we" is me, Amanda, and my boyfriend Igor) are still very early in the game and trying to learn all we can. We are talking to a couple of loan officers about our options as well.
I am so glad we found the Bigger Pockets community. Thank you again for your advice!
If short term a HELOC would make sense. In SC there is no closing cost.. FL I'm not sure but you should check. HELOC on an Investment property will be very difficult to get and your LTV will be well under 80% most likely. If you find something different let me know. Your FL property being your primary residence would be able to qualify for up to 100% LTV though most banks/credit unions will look to do something between 80-90%. If you decide to hold the new investment property instead of flipping it then you can do a cash our refi on it once your done and pay the HELOC back. Then you will have the HELOC available for the next one.