Refi or HELOC? What options do I have?

Question

I bought a single family home in 2017 for 206k with 3% down. Mortgage balance right now is $191k. The property is rented for $1600 per month. Houses in the area are now going for $300k but mine is probably worth $285k. What options do I have to take out the equity?

Thank you in advance for your sugestions.

Joe Splitrock · Answer

The 3% down payment tells me it was owner occupied, but it is now an investment property so you will need 20-25% equity. That means refinance or HELOC will return 75-80% on the appraised value. Assuming it actually appraises for $285K, that would mean an option for cash out of $22K to $37K. Doing a refinance is probably a better route. There are less lenders willing to do HELOC on investment property and some require higher LTV than conventional financing.

One risk to be aware of is the appraisal. As housing prices have been skyrocketing lately, appraisals have been lagging. They are looking at comparables from six months ago in many cases, which can hold value down.

Also be aware when you take more cash out that your deductibility follows use. The interest deduction on the cash out requires investment in another property and the interest is claimed against that property.

One advantage of refinance is you get rid of the mortgage insurance. The disadvantage is your payment goes up, so make sure that money is reinvested elsewhere.

Joe Splitrock · Answer

Talk to several lenders, both credit union and local banks. If the refinance is a conventional loan, most will offer similar. HELOCs can vary greatly by institution because they are holding those in house. Don't be concerned about applying with multiple banks because the credit bureaus consider multiple credit pulls at the same time as a single pull. That is so people shopping rates don't get multiple hits on their credit report. The point is that it is better to do it all at once and let them all compete for your business.

Emilio Betancourt · Answer

@Joe Splitrock thank you for your comments. Should I check with a credit union or is there a better place to start?