Mortgage vs Equity Loan

[Thomas Brinkman]

Hi All! 

We own one property (our home) worth around $500k, no debts owed.

We would like to purchase a second place as a rental property for 200k-250k.

We also have to renovate our current home (estimate cost around 65k).

I currently have around 80k in cash.

What do you think would be the best approach. Should we use the cash for a down payment on the new property and then use an equity loan for the renovation and the remainder of the cost of the investment property? Or get a mortgage with the property (I heard interest rates are lower with mortgages than equity loans) and equity for the renovation. 

I know its ill-advised to borrow, but we plan to leverage debts for the property. Just want to see what you guys think.

Thanks!

Tom

[Jeff Copeland]

Run the numbers and see what makes the most financial sense. 

I tend to prefer a HELOC for investment purposes, it has many advantages:

1. You only pay if/when you use it. No balance = no payments. 

2. It's a revolving line of credit. You can use it, pay it off, use it again, and repeat as many times as you want. 

3. You can get often a higher LTV on a HELOC on your primary residence (85 to 90% is not unheard of) than with a refi.

4. Many banks offer low or no closing costs loans, and a low introductory rate for the first year or so (though personally, I am not that rate sensitive when it comes to a HELOC - it's always a lot cheaper than hard money or a credit card, and I don't use it for long term debit, so frankly I don't care all that much about the interest rate. I'd happily pay more for the flexibility it offers compared to a fully amortized refi).