HELOC vs. Cash Out Refi
Dan ShelhamerPro Member
Realtor · Mesa, AZ · Member since 2015 · 163 posts · 99 votesHELOC or Cash out Refi? This may be a dumb question, but just wondering which one is better to use? Which one is a cheaper way to do it, or are they basically the same thing?
I currently owe $176k on my primary residence, and it is worth $225-230k. Also, a current rental property I am looking at would have roughly $68k in equity after fixing it up if my numbers are correct. Is their a way to pull out the equity on both of these properties in order to then have 80-90% of $117k (total equity in both). Then be able to buy 2-3 more properties with that. Also, want to make sure I am not over leveraging myself but my strategy is long-term hold so I'm not sure if that even matters. Please let me know your thoughts/advice.
Thanks in advance!!
I know it's everyone's least-liked answer, but I'm going to have to give it anyways: "It depends."
HELOC - You can open it with a large available balance, but a current balance of $0, and probably have some trivial annual maintenance fee while it's open with zero balance. Some combination of a higher interest rate or being adjustable rate will happen here, but the great thing is that you're not paying interest on the money until you need it.
Cash out refinance - You get the money now, and pay interest on it now. Lower rate and can stay fixed rate. Great thing here is you can show sellers proof of funds and be an all-cash buyer.
So you need to ask yourself how ready to make a move you are. If it's "now!" then cash out refinance might be the best route. If you're going to sit on the sidelines for months/years waiting for the perfect deal, go HELOC.
If you go the HELOC route: after you've made your move, whatever and whenever that is, you could then do another refinance to consolidate the HELOC and the old first mortgage. This has closing costs. So you need to figure out if interest saved via HELOC route + refi closing costs, is a net savings or not.
The longer you're going to be on the sidelines, the more appealing HELOC is. If you want to be fast, cash out refinance now -- and you can even show sellers that you've got $XXXk sitting in a checking account waiting to be wired.
EDIT: fun trivia. Some RE people transition into being hard money lenders by having maxed out HELOCs always open but with minimal balances. Someone's in a tough spot and needs $50k? Boom, here it is. This person will pull it from their HELOC at say 5% to lend out at say 12%. (Recorded as a private mortgage with the county, etc)
I know it's everyone's least-liked answer, but I'm going to have to give it anyways: "It depends."
HELOC - You can open it with a large available balance, but a current balance of $0, and probably have some trivial annual maintenance fee while it's open with zero balance. Some combination of a higher interest rate or being adjustable rate will happen here, but the great thing is that you're not paying interest on the money until you need it.
Cash out refinance - You get the money now, and pay interest on it now. Lower rate and can stay fixed rate. Great thing here is you can show sellers proof of funds and be an all-cash buyer.
So you need to ask yourself how ready to make a move you are. If it's "now!" then cash out refinance might be the best route. If you're going to sit on the sidelines for months/years waiting for the perfect deal, go HELOC.
If you go the HELOC route: after you've made your move, whatever and whenever that is, you could then do another refinance to consolidate the HELOC and the old first mortgage. This has closing costs. So you need to figure out if interest saved via HELOC route + refi closing costs, is a net savings or not.
The longer you're going to be on the sidelines, the more appealing HELOC is. If you want to be fast, cash out refinance now -- and you can even show sellers that you've got $XXXk sitting in a checking account waiting to be wired.
EDIT: fun trivia. Some RE people transition into being hard money lenders by having maxed out HELOCs always open but with minimal balances. Someone's in a tough spot and needs $50k? Boom, here it is. This person will pull it from their HELOC at say 5% to lend out at say 12%. (Recorded as a private mortgage with the county, etc)
@Chris Mason Awesome points. Cash out refi sounds like the way to go for me because I do not plan on sitting on the sidelines. Also, a huge advantage is being able to buy those 'cash only' purchases and going to auctions. Your point on how some RE investors become hard money lenders is very eye opening, and a strategy I have yet to hear! Thanks again Chris!
Chris M. I to am looking at a HELOC - could I be considered an all cash buyer as well since the funds can be withdrawn at will even though they would not be in my account?
You could certainly make that case to a listing agent and trust that she can accurately present that to her client, yes. Include some sort of one page "Current balance: $0, available balance $200k" documentation in the offer, with your name visible but acct # and address blacked out.
Or you may want to keep things simple and easy to understand for the seller, whom you very well may be more sophisticated than. If this is the route you want to go: draw upon that HELOC so you can show it as sitting in a checking account, have your realtor include that screenshot (with your name visible, but address and acct numbers blacked out) with the offer.
If they take your offer, great! If not, pay that HELOC right back immediately. Interest may or may not accrue for those few days, but 'a few days' or even 1 month is a heck of a lot better than months and months and years and years that you're on the sidelines waiting for that perfect deal. Call that trivial amount of interest a marketing expense, because that is exactly what it is.
EDIT: Oh, you are a realtor. OK, so I guess then it depends on your view of the listing agent and her ability to present information to her clients.
Hey Dan. I'm a local lender and I happen to have a great contact for you right here on BP. @Michael Barbariat First Midwest Bank. One of the only banks that will do heloc's on investment properties, and they just happen to be right here locally. They also do heloc's up to 90% on your primary residence. The advantage of doing heloc's is that you can pull out more equity than a cash out refi, and you only pay interest when you need it. Cash out refi only gets you 80%. Be careful to make sure your debt-to-income ratio stays low, because heloc's are looked at differently by lenders when qualifying for future mortgages. You don't want to get stuck. Also it might be advantageous to refi the mortgages before you take out the heloc's, especially with rates just having dipped down to recent lows.
When it comes to REI, it's critical to have an experienced, investor-friendly lender take a look at your whole picture and go over all your options. Like I said, one wrong move of overleveraging and you could be stuck. Let me know if you have any other questions.
Hey Dan. I'm a local lender and I happen to have a great contact for you right here on BP. @Michael Barbariat First Midwest Bank. One of the only banks that will do heloc's on investment properties, and they just happen to be right here locally.
Hey Zack, glad you're from the midwest and have a head on your shoulders, maybe you could educate me. Even out here on the West Coast, we all broker purchase and >80% CLTV HELOCs from the exact same 2 or 3 banks... ALL in the midwest. With so few lenders, all from the same area, it's not a particularly competitive marketplace:
A borrower can shop me v 30 other lenders in the Bay Area for 80/10/10 jumbo financing. 15 will say "no, can't be done," and the other 16 of us all going to say "yup we do that," and then proceed to quote the exact same interest rate on the HELOC 2nd, under the exact same terms and conditions, using the exact same product, from the exact same bank. The only possible exception is if one of my competitors are lying about the terms/conditions of the HELOC and hoping no one reads the paperwork.
What do you folks out in the midwest have going on that makes local institutional willingness to do exotic HELOCs so much higher?
I know the bank you are speaking of, we use them too, and I don't know of anyone else lending 90% CLTV seconds in CA.
I think here in the Midwest, lenders weren't as burned by the housing bubble and meltdown. Property values here didn't decline as far as CA, and many other coastal states. So I think lenders are reluctant to re-enter many of those markets with high CLTV second liens.
EDIT: fun trivia. Some RE people transition into being hard money lenders by having maxed out HELOCs always open but with minimal balances. Someone's in a tough spot and needs $50k? Boom, here it is. This person will pull it from their HELOC at say 5% to lend out at say 12%. (Recorded as a private mortgage with the county, etc)
Hi Chris,
A question on what you said, if they do this as a private lender, how do they get their monthly payments when the investor that needed the money has it tied up in their investment until it produces pay back.
Whether it's a flip and they sell at the end or it's a buy and hold and they do a cash out refi to pay back the private lender.
Seems like the private lender is lending but how do they get their money back?
Sorry if it's an obvious question but I don't deal with private or HML and am learning about their structure.
Thanks!
EDIT: fun trivia. Some RE people transition into being hard money lenders by having maxed out HELOCs always open but with minimal balances. Someone's in a tough spot and needs $50k? Boom, here it is. This person will pull it from their HELOC at say 5% to lend out at say 12%. (Recorded as a private mortgage with the county, etc)
Hi Chris,
A question on what you said, if they do this as a private lender, how do they get their monthly payments when the investor that needed the money has it tied up in their investment until it produces pay back.
Whether it's a flip and they sell at the end or it's a buy and hold and they do a cash out refi to pay back the private lender.
Seems like the private lender is lending but how do they get their money back?
Sorry if it's an obvious question but I don't deal with private or HML and am learning about their structure.
Thanks!
You're over-thinking. :) The concept of paying to rent a thing is the same if it's a car, money, or an apartment. The only difference is that if you're renting money, the price is expressed as an interest rate. You pay money to rent a car, you pay interest to rent money.
If we assume a $100k note at 10% interest only, that's $10k/yr or $833.33/month. This person flipping will still owe the lender that monthly payment of $833/month - else, that $833 will be tacked onto the outstanding balance (google "payment option negatively amortizing ARM" if you want to go down recession-causing a rabbit hole) along with any late fees.
Many people can come up with $833/month a lot easier than $100k right damn now, which is the whole reason that some person a zillion years ago invented mortgages.
This person paying that $833/month is basically renting the lender's $100k. When he sells the home, he gives the lender back the $100k. Kind of like when a tenant vacates and returns a unit. They pay each month until they give the unit back to you, the person that made the thing available for rent.
In this case, we're actually talking about lending borrowed money. If our hypothetical HML using a HELOC had that HELOC at 5%, he would in turn owe his bank $416.67/month.
So he is renting $100k for 5% ($416/month), and in turn making it available for someone else to rent for 10% ($833/month). Positive cash flow is, you guessed it, $416/month to re-rent money you yourself have rented. Think of this as subletting, if you wish.
Thank you the light bulb just lit up over my head!
Hi Dan,
I would echo the same great advice that's been given, so i'll just add my 2 cents.
I have been using a HELOC because I've been pulling my cash out to buy with cash. Then after I refinance my purchase I pay back my HELOC. This saves me the continuous monthly payments, until I find my next deal. Once I have exhausted my HECOC, I will lock in the rate. I thought the best you could do was 80% but I'm contacting Zach Karp's buddy to go for 90%; thank you!
For investment property HELOC's I use PENFED, they can go up to 80% LTV but must have $25k minimum loan amount. Which sounds like won't be a problem for you. They have a higher interest rate of around 8%, which to me is perfectly fine.
As far as over leveraging, in my opinion I would leverage up to 100% if I could so long as my cash flow is solid. I aim for the 2% rule and deal almost exclusively with low income multifamily, so my risk of getting upside down cash flow wise is low. If my cash flow was more tight, I wouldn't feel as comfortable in a high leveraged situation.
@Zack Karp thank you very much for the reference! I was just about to start calling around to local banks so I will definitely reach out to your contact. 90% sounds amazing.
@Josh Nicolson great idea on using a HELOC & then paying it back with the refi!
@Chris Mason more great stuff as always!
PRO member for only a couple days, and it's already paying me back :)
Washington has a few credit unions that offer 100% LTV Helocs on primary residence.
@Mellisa Otwell activated my keyword alerts =)
State Department Federal Credit Union does fixed/variable Home Equity loans on primary residences up to 125% (up to $100), or up to 95% (up to $300k). Up to $500k for the standard 80% LTV I believe. They're on the east coast, but I think they lend everywhere; they lent to me on the other side of the country.
@Chris Mason Glad you're teaching people the ropes about using HELOCs for private lending. I've been teaching that to my friends and family here too! So many people have built equity in their homes, and they even brag about it, but that equity does nothing for them. Take out the money and lend it, and then you essentially make money off other people's (or the bank's) money. And it tends to give you better cashflow than rental properties do, with less headaches. Imagine if you had multiple properties and could take out $1M. If you borrow at 4% and lend at 12%, you'd essentially make an $80,000 salary doing nothing.
This is what the banks do You walk up the door and you see a sign on the left that says, "Put your money with us and we'll pay you 1%." Then on the right side, there's a side that signs, "Borrow from us for only 5%."
I want to thank everyone for this thread. I am applying for a HELOC on my SFR that I just completed and hoping to get about 63K (75% LTV). My thought was to use this, and the private money that I have, to purchase another property and for renovation costs. This discussion gave me a whole different outlook on money for future use.
This is what the banks do You walk up the door and you see a sign on the left that says, "Put your money with us and we'll pay you 1%." Then on the right side, there's a side that signs, "Borrow from us for only 5%."
It's so arbitrary that it's... arbitrage! (I crack myself up)
@Michael Barbari if property was purchased by S Corp would it be best to quit claim in personal name to obtain HELOC?
EDIT: fun trivia. Some RE people transition into being hard money lenders by having maxed out HELOCs always open but with minimal balances. Someone's in a tough spot and needs $50k? Boom, here it is. This person will pull it from their HELOC at say 5% to lend out at say 12%. (Recorded as a private mortgage with the county, etc)
Anyone using this strategy?
@Chris Mason this is by far The best “It Depends answer ever”! Thank you sir! You ever in Austin Tx hit me up, I’ll help make sure you maximize your Trip.