Houston, TX · Member since 2019 · 27 posts · 3 votes
I have a good amount of equity in my home and I do have a mortgage. I have been trying to weigh pros and cons of HELOC vs Cash out refi. I want to use it for down payment and rehab on a rental property. Any insight would be appreciated.
Theres alot of ifs here ill try to cover it as best I can.
If you have a deal in mind already and want to put in an offer, or plan to put in an offer, AND your current rate is higher than your refinance rate then a cash out refinance is your best option.
If you dont have a deal in mind the HELOC is good because you dont pay interest until you find a deal, and if you never find a deal you never pay interest, you just pay whatever fees the bank requires to keep the line open and the closing costs.
Cons to the cash out refi:
You have a finite amount of money, if you close for 90,000 thats all your getting. If you only needed 80,000 theoretically you could just give the 10k back but if you needed more your in trouble without a plan
Cons to the HELOC:
Your cash flow is going to have to be strong, because your paying back two mortgages at once now. HELOC is generally short term ie 5 years. So now instead of amortizing that money out over 15 years or 30 compared to the cash out refi you have a larger payment due on this monthly for the life of the loan. (The one I've used is 5 years then converts to a 15 year second mortgage).
Every bank is different make sure you understand the products they offer.
A HELOC is flexible. You can use it to pay cash for a property, renovate it, then get a mortgage on it paying off the HELOC and repeat continuously. You also can pull out of your HELOC just the amount you need and when you need it - not stuck with a set amount upfront. My HELOCs and many others have a 10 year draw period with a 30 year payback. Interest is variable though based on prime rate minus x. I have no yearly fees to keep it open and closing costs up front was only the transfer taxes.
If you are planning on using a cash out refi for the duration of the investment property ownership, you can probably get a fixed rate that would be cheaper (or less interest rate increase risk anyway).