HELOC or Refinance on investment property

7 Replies

Trying to decide best strategy here: have a single family investment property currently valued at 110k with a loan bal 54k. I understand the cost associated with refi (appraisal, closing cost, points etc) vs heloc (appraisal). I also understand limited options in bank willing to do heloc on investment property. Plan is to use the fund for a down payment on another property. Qus 1: heloc or refi? Qus 2: if heloc, is it possible to use this fund for a down payment? If so, how? I haven't taken out a heloc before but i understand it works pretty much like a credit card. Will appreciate any inputs. Thank you all very much.

I’ve done both; it was easy to find a bank to loan a HELOC on investment property and they didn’t care what we did with the money. I’ll stick with HELOC to use as “cash”, decide on the back end if I want to leverage and find a bank/private lender to carry the note, pay off the HELOC, rinse repeat :)

@Jared Skov got the current loan in 2016 @ 4.75%. Since i technically haven't found the next deal yet, I'm unable to determine cash flow on it. If heloc is the way to go, will i be getting a "credit card" style of fund that i can then tender as down payment on the next house?

@Olu Efunwoye Lines of Credit on investment properties are usually a lot harder to find than a HELOC on a primary home. I would also caution you on using a Line of Credit for a down payment unless you have a plan to pay it back. This was mentioned in some of the posts above already but just to clarify why: Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

@Andrew Postell I see your point in the caution. Let's dig a little further: using my numbers above, if i were to draw a line of credit, that would be 34k in order to still keep 20% equity on the property. What you mean by "plan to pay it back" is to consider the monthly payment on that 34k line of credit along with whatever the monthly payment on the next property I am trying to purchase (using the line of credit as its down payment). right?

Please educate me further, is it not the same math i have to factor in if i were to go the route of refinance to pull out that 34k cash (since the mortgage on that subject property will go up as a result)? Although I totally understand the difference in interest with the possibility of the refinance being a fixed rate and the line of credit subject to prime +x%.

I consider myself a new investor despite having 2 rentals, hence i'm trying to learn from this discussion. thanks for chiming in.

@Olu Efunwoye this is a concept more than a true numbers thing. So conceptually, your payments might be ok year 1. But what will they by year 2? Year 3? Year 7? And then in year 10....what then? So the concept behind a Line of Credit or a HELOC is that it is a good product for temporary money. It is not designed for permanent financing because the product will adjust and then modify later. Does that make more sense?

@Andrew Postell Absolutely! It does make sense. If I ever choose to go with the line of credit, I will take care to consider not just the fluctuating rates but also keep in mind the year count before it reaches maturity date into a fixed product for a longer term. I never knew this before, until I read your post. Thanks again.