HELOC or cash out refinance?

[Parker Larsen]

So I'm having some analysis paralysis with looking at a Cash out refi vs a HELOC on my primary residence.

To paint a picture, living in a townhome and will rent it out when we move in 2-4 years. I want to take advantage of the equity and invest in a property. I can do a cash out refi and increase my payment nearly $500 a month or I can get a HELOC.

The HELOC is appealing because I can use it when I find a deal and I only pay back what I use. But it also seems very risky to borrow against my primary residence. On the other hand, the cash out refinance would increase my payment to a point where I would cash flow only $100-$200 when I end up renting the place and moving out.

Anyone have experience with either? Do you prefer one over the other?

[Alex Roter]

Hey @Parker Larsen, It sounds like the HELOC option would make more sense, since you do not have an immediate need for the cash out. Both options are leveraging the equity in your primary residence, so they are equally as "risky." But having the cash available in a HELOC would allow you to move quickly on a new purchase when the time arises (2-4 years from what you mentioned).

[Parker Larsen]

@Alex Roter Thanks Alex! Thats what I'm thinking as well. I'll be using the HELOC to invest this year but seems a little more risky but also more flexible.

[Andrew Postell]

@Parker Larsen To me there's a couple of main points of difference between the two:

1. Lines of Credit have low costs

2. Mortgages are fixed Rates

What this means is that a Line of Credit is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. Rates are low now...but what will they be in 5 years?, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

However, if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!

[Kerry Baird]

I second @Andrew Postell on the short term vs long term use of HELOCs.  

[Parker Larsen]

@Andrew Postell Thank you Andrew! That is really helpful. I was thinking of using the HELOC as a downpayment on a good deal and then trying to pay it down quickly with cash flow or doing a cash out refi to pay that back if value goes up a good amount. Also thought about doing a STR and paying that back.

[Albert Bui]

Another thing to add is that you're able to obtain much better loan structuring terms and pricing so it's probably best to obtain the HELOC while you have no need and find a HELOC that has no annual fee or low annual fee so you don't miss that pesky 50-100 annual fee and end up being Late and hurting your credit.

Once you convert this property to a rental and have vacated it you'll see your rates being much higher by .5-1.00%+ and your max loan amounts or LTV's offered drop from 90-95% LTV go down to 70-75% so I'd recommend to look at your planning options ahead time and set them prior to conversion or vacating the property.

To reduce my risk when I’ve utilized these planning strategies I’ve just done worst case scenarios and pretend to max out your line to see what your payment will be today as interest only, what will be the payment all in be when you’ve vacated, what will the payment be when your interest only line converts to principal and interest payment, and will you cash flow ? 

I would not recommend on inflation increasing rents or luck to bail you out but the above would be nice to have and should allow you some of peace to be able to sleep at night.

Happy investing 

[Dashawn Francis]

Hey @Parker Larsen! Let me know if you find that you need more access to capital. Happy to help!