HELOC's vs REFI's which is better and faster to pay off?

Question

I have learned from different mentors I have in RENATUS that using lines of credit instead of loans (amortized) could be much more advantageous because of the leverage you have with lines of credit.

My question to you all is what your thoughts are on HELOC's vs Mortgages. Would it be better to pull a HELOC or Re-finance on a property? Could you get a HELOC and pay off the remainder of your mortgage then pay down the HELOC? Is that smart?

Thomas S. · Answer

I would choose to mortgage the property to the maximum and not pay it down, When equity builds keep pulling out the equity to reinvest. Leaving equity in a rental is undervaluing your money. It needs to be out earning it's keep.

Jeff Dulla · Answer

@Kesi Ika-Kioa If you do what Thomas S. proposes, I would not do a HELOC. Unless your HELOC is 4.00% and fixed for 30 years. I agree with Greg wholeheartedly but I just want to make sure you aren't interpreting what he is telling you the wrong way. If you plan to do that, I do not know why you would ever us a floating, HELOC rate as the debt instrument.

Kesi Ika-Kioa · Answer

Ok I see what you are saying Thomas S.! Thank you for your advice!

Kesi Ika-Kioa · Answer

Well, the property is worth about $300,000. It is my Dads property and he is going to sell it to me for $150,000 just because I'm his daughter and because he needs $ for other business investments. My dad has paid the house down in full and doesnt owe anything on it, he wouldnt be able to re-finance as his credit is less than a 400 so that isnt the best option but selling to me would be best.It works out as I am willing to hold it as it is a previous family home and use it as an investment property (rented out to relatives currently living there) but also use the equity to open up a HELOC for flipping homes etc but not sure if I should get a mortgage and then open up a HELOC, or just a HELOC which I will explain below.

I was told it would be smarter for me to open a HELOC (put my name on the title for at least one day) and give him the needed money ($150,000) and pay it down monthly (much less than a mortgage), we plan on paying it off in less than 5 years, a HELOC term we've been looking at is 10 years at a 4% locked interest rate. I qualify for $150,000 4% 30 year loan but if we open up a HELOC it would be cheaper (no closing costs) and we have at least 80% of the HELOC to use and pay down with the help of my Dad's income as we just want to keep the family property in our possession. Hope that all makes sense!

Andrew Postell · Answer

@Kesi Ika-Kioa I feel that Lines of Credit (LOC) have 2 advantages - Costs and Reusing.  The costs on a LOC is signficantly lower than a mortgage.  And the fact that you can use it over and over again like a credit card (you just have to pay the LOC back) is super helpful - especially for flippers.  However, LOCs are not designed for long term use.  What I mean is that it is normal for a LOC to change to a regular loan in 10 years.  So after having your LOC open for 10 years it will then likely become a 20 year mortgage.  How would you like to have a high interest, variable interest rate mortgage for 20 years?  Nobody wants that.  So the important thing about a LOC is that you pay it back relatively quickly.  Or to reuse it over and over.  If you need to buy another property and hold that property for a long time then a mortgage would be better suited.  Hope this helps!

Jeff Dulla · Answer

@Kesi Ika-Kioa It comes down to the cost on each instrument you are using and the timeline you plan to have it open. What is rate on the first mortgage? What is rate on proposed HELOC? How long until you pay off the proposed first mortgage or HELOC?

HELOC's vs REFI's which is better and faster to pay off?

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