HELOC to pay down payment on 2nd home or cash out refi?

Question

We have a primary residence that we locked in a good rate of 2.45% and are wanting to purchase our 2nd investment soon. We're considering our options and are curious if we should utilize a HELOC, cash out refi, or just sell it?

Since our rate is so low now, I would hate to make that go up by refinancing. But on the flip side, our current lender we're trying to go through said we can't use a heloc when it's an investment property. We live in the home as well and rent out a garage apartment in the back so I can't understand why that matters.

I would really like some help here as we're very ready to move out of this home and go somewhere else to build up our portfolio. Any help would be massively appreciated.

Eric Piccione · Answer

Good points, so comparing selling and Home Equity Line, we wouldn't want to start from ground zero by selling and getting property #1 again. For us, we have some cash on the sides but not enough for a down payment. That said, we would definitely want to start acquiring properties quickly. What if we don't need the full lump sum? We're looking for enough to purchase the next property and do some minor renovations after that, nothing major. Curious to hear your thoughts as we want to start tapping into our home to get us further along on the real estate journey just unsure where to start.

Eric Piccione · Answer

We'd actually still be net positive with a refinance. This house hack has done pretty well and we'd estimate it to still be ahead $500+ after everything is said and done. Not including the gains from the next property and what we'd get for it. What are your thoughts on a home equity line?

Reid Chauvin · Answer

@Eric Piccione - truthfully, your best bet is to save up enough funds for the downpayment/closing costs. If you are looking to buy a new primary there are a few different low down payment options (i.e. 5% down or less), depending upon your situation. You also have the options of getting a cash gift from relatives to assist with your upfront costs.

Selling the home makes sense if you won't have solid cash-flow when you turn it to a rental. Getting a HELOC will be difficult, plus you have to contend with how you will pay it off. A cash-out refinance will, I imagine, make it pretty tough to cash-flow on your former primary residence.

Andrew Garcia · Answer

Hi @Eric Piccione, if you are taking out a HELOC as a primary residence, you would have to live in that property for a designated period of time afterward.

Your current lender does not want to be held liable if the loan gets called due because of mortgage fraud.

Since you are considering moving, selling might be your best option. That way, you have more capital to deploy.

However, that interest rate is very tempting and is hard to give up.

I agree with Scott Trench's post HERE about why a HELOC should not be used as a down payment.

A cash-out refinance would jump your rate up 3-4% so that is likely not the best option.

There is another product that might be the best of both worlds. It is a fixed-rate fully amortizing second lien known as a home equity loan.

It is essentially the same as the first mortgage but with a higher interest rate and a lower balance.

If you plan to keep your current residence and your low interest rate, I would recommend that option.

Hope this helps! Let me know if I can be of any assistance.

Conner Olsen · Answer

Brandon Turner explained it well, he said it doesn't matter your rate as long as you'll be making more in cash flow. Let's say your primary home payment goes up $500/month but your new rental will be having cash flow of $700/month, then you'd be making an extra $200/month by refinancing. That's just one way of looking at it, hope it helps!