This is my first entry on the BP forums, and my first move into real estate investing. I'm not a finance guy so I’ll try to stay coherent. I bought my current home in Philadelphia back in 2012 for $130k, and has since appreciated to roughly $350k (bought in the path of progress). It was a real dog when I bought it, but have since put a ton of sweat into bringing it back. The plan is to build on top of my 1-story garage to create a 750 sq.ft. 1-bedroom apartment. For many reasons, that I won’t get into, I feel that building onto my current property is the best first move for me. (If anyone is interested in that, just ask).

For the sake of these calculations, and simplicity, I did not factor in changes in insurance, taxes, maintenance, etc. Also, I attached a spreadsheet for reference.

Here are the facts:

* If I do nothing, my current mortgage will be fully amortized in 11 years. The interest rate is 3.5%

* I currently have an open HELOC on the property for $95k (no balance). I can do a fixed-rate cash advance for 6.125% for 20 years.

* Speaking to a loan officer, based on my current income & the equity that I have in the house, I can do a cash-out refinance, and pull $175k in cash out at a 3.75% interest rate.

So my options are:

OPTION 1: Keep my current mortgage, and use the fixed-rate HELOC to pay for the addition. My thought is that I can increase the Heloc on the property once the addition is complete to use toward my next purchase.

Pros:

- Total cost in the end is far less than any other option (by over $100k)

- Monthly payment is reduced by $900 after 11 years

Cons:

- Can’t pull money to make another purchase until apartment is constructed, (if the market will still allow).

Option 2: Pull the trigger on the cash-out refinance now while I can, and take the $175k to invest in the addition and a future property. The plan would be to pay the minimum payment until the apartment is rented, then begin to pay the higher amount to be paid off in 15 years.

Pros:

Locked in low interest rate for this and future investment.

Lower monthly minimum payment would reduce risk during months that the apartment is not rented.

Cons:

Would end up paying roughly $120k more in interest

Option 3: Do a cash-out refinance for $192k. (That number is the 95k HELOC + My current mortgage Balance, meaning I would cash out $95k). I used that specific number to make an apples-to-apples comparison to option 1. The payment plan would be the same as option 2.

Pros:

My minimum monthly mortgage payment would only increase by roughly $100, which would make this initial investment very low risk.

Cons:

Would have to rely on the higher interest Heloc for next investment. (Assuming I can pull another HELOC due to the increased property value).

Thanks in advance for any advice you can spare, and if you see another option that would trump any of these would be greatly appreciated.

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