Heloc Versus Conventional loan refi with cashout on Vacation home
Investor · Burtonsville, MD · Member since 2018 · 32 posts · 2 votes
Hello all- Would like a feedback response from the BP community I am contemplating between getting Heloc Versus Conventional loan for a Refi with cashout on Vacation home/ 2nd home. This home was bought for cash and gutted and totally rehabed and I am trying to find the best way to leverage my equity for growth in terms of buying property for cash to get some level of discount/ renovate/ refi using the brrrr strategy, so my funds will be for the short term interim period whereby I can refi and reuse the funds for the next potential purchase. What would be the best way about doing it to get the best leverage as I can get a heloc with fixed rate for 1 term and then goes prime+ on 10 year draw and them amortized for 20 years or get a Refi cashout on a 3.75 30 year loan , other thing is that heloc option allows me to pull upto 85% LTV and a Refi cashout will allow me to pull only 75% LTV, also with these heloc or the Traditional mortgage on my second home where its been over 1 year will the lender offer loan based on the purchase prive or the appraisal value/Comps as One lender stated they go with the lower amount of the purchase versus appraisal
Hi Stanley, this is a great dilemma to have! Do you know what price point you want to buy your next BRRRR at? If you do run your numbers using both scenarios. If you purchase a house for $150k using the heloc how much interest, closing costs and refinance fees would you occur? If you purchase a house for $150K using cash out refi how much interest, closing costs, and refinance fee would you pay? You can run your numbers over the next 5 - 10 years too. This will give you an idea of how much you are paying upfront for this financing and what it would look like down the road.
Hi Stanley, this is a great dilemma to have! Do you know what price point you want to buy your next BRRRR at? If you do run your numbers using both scenarios. If you purchase a house for $150k using the heloc how much interest, closing costs and refinance fees would you occur? If you purchase a house for $150K using cash out refi how much interest, closing costs, and refinance fee would you pay? You can run your numbers over the next 5 - 10 years too. This will give you an idea of how much you are paying upfront for this financing and what it would look like down the road.
@Stanley Dean
My first thought is why use a hloc and expose yourself to a variable rate? I know rates are low and probably won’t go up quickly, but what is your exit strategy or tolerance to rising rates?
When you run your numbers, will you have pulled out your original equity with the conventional loan?
Thank u Ashkey n David for response- Ashley on a heloc loan there is no expense with closing and appraisal is free by the bank, but when used to buy for cash and refi will incur closing cost typically for range of home in 150-160k range adds to about 5000 in closing cost but have 1 closing cost to incur,but on a refi with cash out on a vacation home and then buy a for cash on a rental will incur 2 closing cost. One value on the heloc is being able to use and draw when a property of the right price and rental potential comes and then make payment on heloc until the property is refied and cashed out to back the heloc, goal is to get atleast 20% below market comps minus repair so has some equity build so will lead me to keep atleast 5% into the loan after a investment purchase refi that requires atleast 25% down.
If I understand you correctly, I'm in exactly the same situation you are. I have a fully paid off Short Term vacation Rental (STR) with the question of whether I should get a first position HELOC on it or cash out REFI to liquidate some equity.
I have investigated both paths and have settled on the HELOC for now (for many of the same reasons you have outlined). I believe it will give me a lot more flexibility to pursue a new cash flowing investment.
With a HELOC I should be able to throw rental income, double triple payments, from both new and current properties, to pay down the HELOC rapidly with the added security to pay as little as the minimum HELOC interest premium if needed. While still having access to the credit line instead of the bank. I could also choose to REFI whenever it makes sense; no pressure at all.
Crucially, with the REFI option I would be forced into a large monthly mortgage payment that is typicality higher than a minimum HELOC payment and the closing costs for a REFI as you identified are high. Potentially I could be covering 5K in closing for a cash out REFI where the HELOC is peanuts in comparison. All while paying mortgage payments on capital that is not deployed.
I'm not suggesting this approach is with out risk and there is a little more for me to look at using this approach but at this time I'm more comfortable with the numbers I'm running with the HELOC approach than the cash out REFI approach.
There was a thread on this the other day worth reading. If I can find it I will post it here.
Good luck.
Thank you Marcello great input was wondering what was the leverage means other investors were employing the heloc option versus cahs out refi , although heloc allows one to be your own bank ready with cash to strike when have found potential good rentals, but then we have to weigh in the possibility of rate hike which will be expected eventually with a draw period of 10 years and then have to pay P/I amortized payment with variable rate for next 20 years, so what is the typical play then after 10 years, does one payoff the balance as an investor and get a new heloc since some equity got built by more principal pay down and possible market appreciation or can one get a sizable amount from their heloc they have on a primary home that still draw period available and is interest only and payoff on the heloc on the VAcation home. BTW the strategy to using the heloc to payoff the primary home faster is that a good working strategy. The other risk of heloc is that is a recourse loan versus mortgage is non-recourse loan and the situation of what happened in the 2008 fiesta were heloc were getting frozed by banks since house started to get negative equity, so can that situation come with heloc on Primary and Vacation homes.
I have been trying several community banks and no one seems to offer heloc on Investment rental property but they offer a Commercial Business line of credit secured by the rental investment property, how does that work?
@Stanley dean
To be clear I am in a situation that I am taking risks and developing this HELOC approach. I have the equity and prefer to use my own funds rather than the bank. some would not agree with me. Please understand, I am no expert in this area. So far I have used my access to HELOCs to buy properties cash at auction and then I clear the HELOC as quickly as possible. I have never had a HELOC out for an extend period even close to the 10year draw.
Check out this post from a few days ago.
https://www.biggerpockets.com/forums/49/topics/798521-first-position-heloc-rental-property-cashflow-strategy?page=1#p4733352
Thanks Marcello so the one discounted property you are buying through auction or other means, once acquired and rehabed and rented so you then have it placed on a Portfolio loan that are DSCR / asset value based on a 20/30 fixed rate ammortization, since you have maxed out on conventional loans since having a limit on loans one can get , IS the idea of you using the heloc to pay down primary a good idea? Do we run into the risk of having the heloc frozen on the primary/vacation homes on a down market when having negative equity, what are your thoughts on that.
Hi Christine for heloc I approached m local community bank that as initial 1 year tier rate 19th 10 year draw, I only was able to find 1 bank that offered on my Vacation home- Sandy Spring Bank. On my primary I got it through Third Federal bank that offered Prime rate -1% for the life of the loan. Hope that helps.
A couple of thoughts.
First, the HELOC isn't permanent. The bank can cancel the line of credit at any time. So you could get the HELOC today, go looking for a house find one in 6 months, but the bank changed their mind and cancelled the HELOC at 5 months. Not likely, but possible. If you just refi the money is in your hands and the bank can't change their mind.
Second, comparing the HELOC to the refi seems complicated but it's really not. Presumably you have an idea of when you'll find the next property, and how long it will take you to BRRRR it. As such you can make a pretty good guess as to how much interest you will pay on the HELOC and how much you'll pay on the refi (including closing costs). At this point you know which is cheaper and can make a math based decision. Yes you are guessing on the HELOC and could be wrong. But you make the decision based on the best information you have at the time. And then move forward. Don't get paralyzed by over analysis. If the situation changes going forward you re-evaluate.
Thank you George for great insight and pointers, heloc being at risk of not being permanent and getting closed at. I think it makes sense to just refi with cashout option to lock in today's rate than to risk keeping on a heloc onto next year and so and having the risk of the heloc funds frozen makes it not possible to invest any more especially when the market could take a dip. Like to get further feedback from others as well