Miami, FL · Member since 2015 · 19 posts · 0 votes
Hi everyone,
What are the differences between HELOCs and Cash out Refinances?
How can I do one of these strategies in a way that does not affect my personal debt to income ratio? LLC?
Thanks!
I prefer HELOCs to Cash Out almost every time and here is why:
-When you do a cash out, your mortgage increases and your cash flow on the property shrinks and your DTI ratio changes negatively. You can only use that money once per-se (unless you keep doing cash out refi's, which is possible)
-A HELOC the interest only shows up as a debt, so if you have a $50,000 HELOC for example. Your debt is interest only for 5-10 years typically and therefore it will show up as you owing $200-$300 instead of a much larger amount on a loan. PLUS, you can treat it as a CC, meaning if you pay it down early, you can use it again. Oh and your first mortgage amount doesn't change a bit, which allows you to maintain the cash flow on your property.
I personally will do HELOCs on as many properties as I can. I much prefer LOCs over cash outs, but cash outs do have a role (flips, commercial, etc).
I believe you will find they will BOTH affect your DTI. Lenders are (rightly) picky that way.
Don't even think of trying to hide any debt from Lenders. They WILL find out!
Flirting with mortgage fraud is NOT something you want to entertain!
As for your question, (conventional) cash out Refinancing usually means lower FIXED interest, whereas HELOC loans are likely to be at a higher, VARIABLE interest. (There are other differences).
The purpose of LLCs should NOT be to hide your income/expenses.
Here's the ideal: try to find investment purchases that would result in your income increase being so good, that your DTI ratio would actually go DOWN! Cheers. All the best...
Thanks for the info Brent. Just to be clear it is not my intention to hide my debt/expenses! Lol
The reason I ask is I want to know: How long does it take for a bank to recognize the revenue that comes from a cash flow positive property? When can the cash that comes in offset and officially count as my income?
@Christian Scalla Yes, a bank will hold a cash out loan payment and a HELOC payment against you in the same way. However, they will also count rental income right away. So, in theory, since you only buy a home that will cash flow, your DTI will get BETTER with each investment property purchase you make. If you purchase a property, the bank will count the rental income at the time of purchase even if it does not have a renter. If you are refinancing, then you would need an executed lease to count the rental income (the renter does not have to be in the property - just as long as the lease is executed along with whatever security deposit you require).
ONE REALLY IMPORTANT ITEM TO NOTE: what I just described above are the conventional guidelines. But a bank is allowed to add their own rules on TOP of those guidelines. So you might talk to a bank and here "we need 12 months of rental history to count the income"...this is called an overlay. It sounds weird but banks have these overlays to be more conservative on their approach to lending. When interviewing banks talk to them about what requirements they have and see if you can learn about their overlays. There are plenty of banks out there that lend with absolutely NO overlays. Hope this helps!
I prefer HELOCs to Cash Out almost every time and here is why:
-When you do a cash out, your mortgage increases and your cash flow on the property shrinks and your DTI ratio changes negatively. You can only use that money once per-se (unless you keep doing cash out refi's, which is possible)
-A HELOC the interest only shows up as a debt, so if you have a $50,000 HELOC for example. Your debt is interest only for 5-10 years typically and therefore it will show up as you owing $200-$300 instead of a much larger amount on a loan. PLUS, you can treat it as a CC, meaning if you pay it down early, you can use it again. Oh and your first mortgage amount doesn't change a bit, which allows you to maintain the cash flow on your property.
I personally will do HELOCs on as many properties as I can. I much prefer LOCs over cash outs, but cash outs do have a role (flips, commercial, etc).
Peter T. HElOCs are great when used properly. However in a rising interest rate market as we in now, that monthly payment can start to get out of hand if the HELOC is not properly used and eat into your cash flow
All HELOCs are variables with most terms being Prime plus a margin. So be sure to run all your numbers first beforehand and see if HELOCS and the refi C/O is better.
@Peter Tverdov This is very interesting! Thanks for sharing. I have a follow-up question. Now that interest rates are going up rapidly (~5-6% at the time of this post), would it be even more appealing to use a HELOC if I can keep my 3.1% fixed 30-year mortgage and plan to hold the property for the long term? In the past couple of years, it made since for us to cash-out refinance (i.e. the traditional BRRRR method) because the interest rates kept declining. At that time, we were able to get our cash out and refinance at even lower rate.This has me thinking that it might be time for us to change our strategy and utilize the HELOC in this scenario. Anything that I am missing or any advice? Thanks!