Heloc vs. Cash out refinance

Private Lending & Conventional Mortgage Advice

Heloc vs. Cash out refinance

Belton, MO · Member since 2016 · 11 posts · 3 votes

Hey guys I have an FHA mortgage currently looking to purchase an investment property. What advice can you give me on funding through a cash out refinance versus a heloc. What are rates and costs associated with each.

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Chris MasonPro Member

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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

HELOC is for short term money, cash out refi for long term.

HELOCs have lower closing costs, higher variable interest rate, and interest only accrues when you actually draw funds.

Cash out refinances will typically have higher closing costs, a lower fixed rate will be available, and interest starts accruing right away (even if it takes you 10 months to find your next property).

A common pattern if you may find a deal in a month, or 10 months, not really sure, is to

1) Get any refinancing out of the way, you have an FHA loan so you should certainly drop that off.

2) Get the HELOC, leave the balance at $0 so you aren't paying interest.

3) Buy the rental.

4) Come back to the property with the HELOC and see if it makes sense to cash out refi and consolidate the 1st and 2nd into 1 30YF.

If you're determined to score that deal within the next 90ish days, skipping right to a cash out refinance is probably best. At that point it's just 2-3 months of interest, but 2 fewer transactions, which is a good tradeoff.

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Jared HottleBusiness Member
Real Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
5y
I have been having the same question! To me it will depend on rates and terms but all equal the HELOC on the 1st property at least seems best. You will have cash available to pay cash for a property or do a rehab and once it is rented out and refinanced can pay it back and do it again. To my knowledge those funds will be available to draw from for a period of a few years so you can just keep using them and paying them off over and over.
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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
5y
HELOC is for short term money, cash out refi for long term.
HELOCs have lower closing costs, higher variable interest rate, and interest only accrues when you actually draw funds.
Cash out refinances will typically have higher closing costs, a lower fixed rate will be available, and interest starts accruing right away (even if it takes you 10 months to find your next property).
A common pattern if you may find a deal in a month, or 10 months, not really sure, is to
1) Get any refinancing out of the way, you have an FHA loan so you should certainly drop that off.
2) Get the HELOC, leave the balance at $0 so you aren't paying interest.
3) Buy the rental.
4) Come back to the property with the HELOC and see if it makes sense to cash out refi and consolidate the 1st and 2nd into 1 30YF.
If you're determined to score that deal within the next 90ish days, skipping right to a cash out refinance is probably best. At that point it's just 2-3 months of interest, but 2 fewer transactions, which is a good tradeoff.
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Caroline Gerardo
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
5y
If you have enough equity to refinance to conventional you will save the 1.75 in mortgage insurance and release more buying power.
HELOC's are cheap to set up but variable rate with max of 18 over 15 years. HELOC's can be closed down without notice.
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Alexandro Paredes
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Belton, MO · Member since 2016 · 11 posts · 3 votes
5y
@Jared Hottle
Hey Jared thanks for info but if I pay cash for property using heloc funds how would I refi that property since there would be no mortgage on it.
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