HELOC versus cash out refi?

Real Estate Agent · Yucaipa, CA · Member since 2016 · 20 posts · 4 votes

Hello all,

Looking for ways to use the equity I have in properties I own and have as rentals. I am refinancing out of hard money loans anyway and my income from the rentals with the lower interest rates will cover the additional payment. Any benefit between a Heloc or cashout? Thanks!

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Brian Ellefson

Banker · Perth, Australia · Member since 2016 · 14 posts · 15 votes

10y

Interest deduction on taxes if using a HELOC.

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Brian Ellefson
Banker · Perth, Australia · Member since 2016 · 14 posts · 15 votes
10y
Interest deduction on taxes if using a HELOC.
1 Reply
Trina Seever
Georgetown, TN · Member since 2015 · 9 posts · 1 vote
10y
Just my 2 cents, I'm not a financial manager but I am pretty good with money. It depends. How long do you have left on your mortgages? If its a significant amount of time, say over 10 years,and you can afford it, I'd do cash out. Normally, cash out is a lower interest rate than a HELOC. The benefit of a HELOC, is you only have to pay interest monthly, so your monthly payment is lower than cash out. But, you do have a higher interest rate than with cash out, so long term you will pay more. Also, nobody really likes to think about this, but if the worst happens and you have to foreclose a property, a HELOC doesn't count in the foreclosure. You can't just hand in the keys and walk away like you would if it was a refi. It's kind of like credit card debt...
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Christos Philippou
Wilmington, DE · Member since 2016 · 116 posts · 59 votes
10y
Hey @Cris Johannsen, from the research and reading and chatting I have done regarding HELOCs vs cash out refis, HELOCs are only for primary residences.
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Aaron HowellBusiness Member
Real Estate Agent · Crozet, VA · Member since 2014 · 436 posts · 223 votes
10y
Once the Cash out of the Refi is spent its spent. No do overs. The HELOC could potentially be used over and over and as @Brian Ellefson said the HELOC interest is tax deductible.
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Jeremy Brown
Rental Property Investor · Folsom, CA · Member since 2016 · 140 posts · 70 votes
10y
It depends on what you want to do with the cash. If you want to use it to pay for flips, a LOC could make sense. I hope to do that in the future, but from what I've read, they can be hard to get.
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Cris Johannsen
OP
Real Estate Agent · Yucaipa, CA · Member since 2016 · 20 posts · 4 votes
10y
Thank you all for your input. If I do a cash out I am just taking a larger mortgage. Wouldn't all that interest still be a deduction but at a lower fixed rate? A heloc would still need to be repaid before you could use it again correct? I was not aware of the primary residence restriction so if that is the case than I have only one choice anyway. Only have 5 years into the hard money loans at 8%. Really appreciate all the responses.
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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
10y
You can do a cash-out refi or a HELOC on a rental. (I have done both on rentals.)
As for which is better, it just depends on your situation and how you intend to use the money. If you have an identified use for the money (like buying another property), then a cash-out refi may be the best option because it'll be at the lowest rate, the rate will be fixed, and it'll be for the longest term.
On the other hand, if you don't have an identified use for the money but want it "just in case" (like for big repairs or something that might come up unexpectedly), then a HELOC may be the best option because it's just a line of credit that will be there when you need it but you don't have to pay interest when you're not using it.
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Daniel Ramirez
Investor · Charlotte, NC · Member since 2016 · 89 posts · 27 votes
10y
@kyle J., I tried getting a HELOC on rental properties and was told time and time again that HELOC's can only be obtained for primary residences only (not investment properties). I'm wondering if you used a major commercial bank or perhaps this was a while back and guidelines have changed.
Also, just to add my 2 cents. HELOCs are typically higher interest (downside), but are revolving so they can be tapped over and over (until duration of term is over) assuming you pay balance down prior to re-tapping it. Cash Out Refi is lower interest, but is less flexible in that you will have to open an entirely new loan again to tap into the equity once you pay it down (additional closing costs).
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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
10y
Originally posted by @Daniel Ramirez:
@kyle J., I tried getting a HELOC on rental properties and was told time and time again that HELOC's can only be obtained for primary residences only (not investment properties). I'm wondering if you used a major commercial bank or perhaps this was a while back and guidelines have changed.
It's definitely possible to get a HELOC on a rental property. I got two separate HELOCs from two different banks just last year, each with six figure credit limits.
Here's the thing to know about HELOCs.....there are no Fannie/Freddie rules for HELOCs. Every bank makes up their own rules/criteria. So if a bank tells you that they can't do them on investment properties, the only thing that means is that that specific bank can't do them on investment properties. You can call another bank down the street and get a completely different answer.
In my experience, most banks will only do them on primary residences. But there are definitely banks that do them on investment properties too. You just have to call around.
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Ramsey Howard
Investor · Warner Robins, GA · Member since 2016 · 28 posts · 3 votes
10y
I have had the same issues getting a LOC on investment properties, from the credit union I primarily use, only for primary residence is the typical response. Cash out refinance will give you the same tax interest deduction benefits, and if you use the cash out just like it's a LOC putting it in its own savings account, replacing it as your able to, it'll work just like a LOC. Just my opinion, and as you use that LOS (line of savings) you don't pay interest on it nor minimum payments during the draw period.
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Garrett M.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 180 posts · 66 votes
10y
Aren't the closing costs involved with a cash out refinance a lot higher? My HELOC on my primary residence cost $99 to close. Are there higher closing costs if its a rental?
@Kyle J. Are the HELOCS you got on your rentals considered commercial or conventional? Thanks!
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Paul DefnginPro Member
Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
10y
TD Bank will do HELOC on Investment property up to 75% loan to value.
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David Dye
Real Estate Investor · Torrance, CA · Member since 2015 · 186 posts · 45 votes
10y
@Cris Johannsen
Keep in mind that HELOCs are adjustable. If you are trying to get into a stable loan, HELOC would not be the way to go.
Would love to connect with you!
-David
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Garrett M.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 180 posts · 66 votes
10y
@Paul Defngin
Hello, do they still call them helocs if they are on investment properties? Do you know whether they will lend on a property owned by an LLC?
Thanks for your post!
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Paul DefnginPro Member
Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
10y
@Garrett M.sorry for the late reply. I do not believe that they will do a HELOC to an LLC. The clients that I have done first trusts for have only gotten HElOCs in their name on NOO properties. Good luck.
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
Originally posted by @Cris Johannsen:

Thank you all for your input. If I do a cash out I am just taking a larger mortgage. Wouldn't all that interest still be a deduction but at a lower fixed rate? A heloc would still need to be repaid before you could use it again correct? I was not aware of the primary residence restriction so if that is the case than I have only one choice anyway. Only have 5 years into the hard money loans at 8%. Really appreciate all the responses.
If you do a conventional refi (for the purpose of getting rid of your hard money loan/s), you needn't be taking out a larger mortgage, but could be just going for the (much) lower interest rate!
Depending on your goals, and available new "deals" in your preferred market, taking out more than what you already owe to Hard Money Lenders need not be done right now.
But you certainly should go ahead with getting rid of any ~8% interest loans (with ~4% ones) now!
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Cris Johannsen
OP
Real Estate Agent · Yucaipa, CA · Member since 2016 · 20 posts · 4 votes
10y
Great thank you all for your input!
Cris
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Jennifer T.Pro Member
Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
10y
My HELOC is an important tool for my REI, although it is on my personal home. I like their flexibility. I use the money I take out for down payments and major repairs. Then continually pay it down and do it all over again.
Long story short, I'm about to close on a duplex with cash from my HELOC. The bank I was going to be using for financing on the duplex botched things big time. My plan is to fix up the duplex, get it rented out, and then do a cash-out refi in 2-3 months to "pay back" my HELOC.
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Ray Jansma
USA · Member since 2016 · 66 posts · 18 votes
9y
@Jennifer T. you have to wait the 6 month seasoning period to cash out refi
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Jennifer T.Pro Member
Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
9y
Originally posted by @Ray Jansma:

@Jennifer T. you have to wait the 6 month seasoning period to cash out refi
Hey Ray, thanks for the advice. Alas, it turned out to be a moot point. HELOC's only have a 10-year amortization, and buying the property cash made my monthly payment huge. Which threw my debt-to-income ratio really out of whack. Plus I used my credit cards for the rehab and went from a low utilization to a high one. Which torpedoed my credit score, until I get the balances down.
At any rate, I still haven't done the cash-out refi because of these problems. But I expect to start the process in another 1-2 months. By then, my credit card utilization will be back below 25-30%.
At that point, I will have owned the property for just shy of one year anyway.
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