Pulling out equity from primary residence
Hi BP friends,
Following some great advice on this thread: https://www.biggerpockets.com/... we are looking into refinancing options to pull equity out of our primary home in SF, and use it to build our investment portfolio. That said, I have a few questions:
(1) We're exploring both HEL vs. HELOC. I think I understand the basic differences, but any thoughts from someone who has been there done that for your primary home, on what you chose and why?
(2) Using the equity, we would ideally want to stagger buying our investments properties over 6 - 18 months (vs. all at once) At the same time, take advantage of the low interest rates in today's market. My understanding is HELOC provides the flexibility to use the line of credit on an as needed basis, but has variable interest rates. HEL, on the other hand, has fixed rates but requires us to pull out all or nothing (no flexibility in draw schedule). So trying to explore if there's a way we can get best of both worlds (flexibility of using line of credit and low / fixed interest rates).
(3) are there other considerations we should keep in mind as we go down the path of taking a HELOC / HEL loan on our primary residence? We understand the risk of putting our house down as collateral and the implications of doing so. Anything else we're missing from a future credit worthiness perspective, eligibility for future loans, etc.?
(4) any recommendations on whether we should approach corporate banks vs. credit unions? Or just go with whoever is able to offer the most suitable rates / loan terms?
(5) and finally, do you all have recommendations for loan agents / officers who can help us think through what would be the optimal path for us given our situation?
Thank you for your help!
Varun
Hi Varun!
Some few things I've picked up along the way...
HEL is primarily from investment properties. HELOC is from your primary home. This can't be tax deductible unless you use it to renovate/rehab your primary home.
Have you thought of cash out refi instead? This is lower rate, but yes you pay the interest right away compared to HELOC when you just pay when you pull out the money. But this is tax deductible if you use it to purchase investment properties. If you already know what and where to buy, might as well get cash out refi. But if you want to spend some time shopping around for now, then HELOC might work better for you.
Credit unions will offer better rates for you.
Cash out Refi's right now are very attractive, especially on a primary residence. I would compare the two, get a quote from both sides. This will give you a clear idea on which way is better for you to go. If your current interest rate is not as low as it could be, this might add to your reasons to cash out.
@Varun M., I am born and raised in the Sunset so I know quite well that you want to go somewhere more sunny! I thought it was interesting no one in the other thread liked the idea of moving to a duplex. I would say to take your wife to open houses and get a feel for what is out there. If your wife doesn't like anything, then staying put and pulling equity out to invest is an option, unless she wants to move and buy another SFH somewhere else to live in. Primary residences are so personal that they are sometimes tough to form an investment decision on.
If you are set on pulling money out, first thing is to look at your current primary loan terms. If the interest rate is low, thats great, if not, you could consider completing a refi or cash out refi on the primary loan. It will be easier to do so now than after getting a HELOC/HEL as your rate will be slightly higher trying to keep the HELOC/HEL while refi'ing the primary loan. I think you hit some of the main points on using HEL/cash out refi vs HELOC. I would add that usually HELOC's are interest only so your monthly payment will be lower than a principal and interest payment for HEL/cash out refi.
Getting one over another depends on your investing outlook, what you are investing in, how comfortable you are with variable rates, and tax considerations. Some like to use a HELOC for flipping as they pay back the money once the flip is complete. Some like HELOC's because they are interest only and also the interest is tax deductible if used for business purposes (ask your CPA). Some are comfortable with a variable interest rate as rates continue to trend downward. Bank, credit union, mortgage broker, it doesn't matter, just make sure you go with someone with favorable ratings.
In my case, I took a cash out refi of my primary due to the low interest rate and invested the money into a 14 unit building in the South Bay with some partners that we just closed on. We will be investing for the long term so I don't have any issue with getting the longer term debt. Yes, the money did sit for a bit as the timing wasn't perfect but neither is life!
Leveraging up your primary residence is a personal decision. Questions to ask yourself are if you are able to service the larger debt payments on your own if the investment goes south? Is your spouse comfortable with higher or a certain amount of additional debt on your primary? The lender on your investment property 1-4 units, will consider the additional debt payments but also the potential rent (i have heard anywhere from 50-100% of rent depending on the lender) on the property to calculate your DTI. Commercial lending would be a different story.
There is no one right answer for everyone's situation but it sounds like you are asking the right questions and you'll do well. Biggerpockets can offer a lot of opinions, its up to you to shift through and decide how you want to invest and how it will fit into your lifestyle. Investing is not all about the numbers either, there are lots of intangibles that don't make it onto a spreadsheet and yield calculation.
@Melissa Argente great info! Thank you so much. Looks like cash out refi might be the way to go once we know which property we want to buy.
@David Kelly makes sense. Appreciate your help in exploring both options. Our current rate is quite low (2.875%) so that makes scenario analysis a bit more important for us if we are going to consider refi-ing at a higher rate.
@Johnson H. that makes us neighbors! Would love to catch up in person if you're still around. Appreciate you going through the other thread as well. I think she's open to the idea of moving to a duplex, it's just that the primary reason for considering that was to leverage the equity in our SFH, and we learned there are ways we can do that without selling (noob stuff, I know).
Honestly, with the variable (and higher) rates for HELOCs combined with that rates currently are low, I think cash out refi might make sense for us, but I think we need to chart out all scenarios given our current debt + the amount we want to pull out and see how that plays out in a cash out vs. heloc scenario. Might be the way to go about this. If we do go down the HELOC route, I think I would want to around paying down the principal alongside the interest only payments. I am reading that's the prudent way to go about HELOCs if they aren't short term. Let me know if you have thoughts.
Congrats on the 14 unit! Great stuff!! And yes, I see why cash out refi makes sense there.
Appreciate you sharing your more general thoughts on RE investing. I am surely realizing it's way more than numbers - great advice - thank you! I think worst case we should be able to pay the loan if the investment completely goes south, so from a worst case scenario perspective we should be okay. That said, whether my wife would be okay entertaining that possibility or not? That's a different story =) Thanks again!
From interest tracing rules, you can deduct any debt use to purchase a rental property against rental income. One disadvantage of cash out refi is that the interest rate on your primary will be higher than what you can get with a regular primary mortgage. Say you can get a 1M primary loan @ 2.5% but a cash out refi with a 1.5M loan might be @ 3.0%. So you're going to pay a 0.5% premium on your primary in order to get the $500K at 3.0%. You should check whether this is better or HELOC/HEL or getting a straight investment property loan of $500K. I find that HELOCs and cash out refi top out at around $500K, so if you need more, an investment property loan might be a better choice.
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Do a refi, pull cash out and invest either in a MH Park Syndication, Multifamily Value Add or Self Storage Syndication. ................
@Varun Maker one factor to consider if you take a HELOC is the impact it can have on your credit score. If you max it out your debt utilization rate shoots up to 100% on that line of credit which can cause the credit agencies to lower your score quite substantially.
Thanks all for your help. We ended up going with the HELOC to fund a new construction (instead of getting a new construction loan). Plan is to refi once the new build is done and pay off the HELOC. It's what made most sense given the investment opportunity that came our way.
@Tim Delaney we are currently approved for a HELOC of $380k (the appraisal came way lower than I had expected). We plan to use $246k for ~10 months towards the new construction, after which we will refi. Any sense on how significantly that would impact our credit score?
Hi Varun, I'm not sure exactly - I just recall the first time I maxed out my $50K HELOC my credit score took at 30ish point hit. Luckily, I a) had a pretty high score so it didn't kill me and b) I was just flipping the house so I didn't need to go to a bank and try to refi while the score was down. As soon as I paid the balance my score shot right back up.
I know more than 30% utilization is a red flag for the agencies. You may want to try one of those credit score prediction tools - I know I am offered one through Capital One and American Express - if you have any cards that offer free credit score they may also have a tool like that.
@Tim Delaney thanks, I just took a HELOC out, and I think my credit score already took a bit of a hit. Thankfully, I am using it to fund a new construction for the next 10 - 12 months so hopefully it's temporary.