HELOC vs Cash Out Refinance on Primary Residence

6 Replies

My home is fully paid for and I'm looking to use the equity to purchase more properties.

Should I get a HELOC or just cash out refinance and lock in a lower rate?

HELOC is more flexible, but is interest only and doesnt allow for equity to be rebuilt.

From my calculations, the cash out would be only slightly more per month anyway

Thanks for the help!!!

Interesting question Jake. I assume you are considering an interest only HELOC vs a traditional principal and interest payment loan for the cashout. I personally prefer a HELOC over a cashout refinancing. With a HELOC you are only paying the interest on the amount you use on the HELOC. If you don't use the cash immediately, you don't have a monthly payment. If you subsequently need to rehab or need funds for major maintenance expenses, then funds would be available assuming you didn't max out the HELOC. Additionally, should you sell the property, you can payoff the HELOC down resulting in no monthly payments until you are ready to invest in another property. This gives you more flexibility in my opinion. With a HELOC, If you are concerned about equity buildup then just pay more per month than the interest owed. It is the same result as taking out a cashout refinance. The point is you make the choice regarding principal reduction of the HELOC vs being forced through monthly payments of principal and interest payments. If you are paying more per month with P&I then your cashflow may be affected negatively.

There are some downsides to a HELOC such as interest rate increases which is likely to happen. So alot depends on the length of time you need the HELOC and how you plan to use it.

One other thing is that if you look at your debt to income ratio, if you max out the HELOC and then need another loan you might have to high DTI. Watch where that is so you don't get a sudden shock.

@Wayne Bridenstine Thanks for the knowledgeable insight on this. I plan on using the HELOC/Refinance money to put down payments (or cash purchase) on a couple of more properties, so I was leaning more towards the Refinance because of the rate increase risk, but I definitely see the positives with the HELOC!!

@Michele B. Oh wow, didn't even consider the DTI. Would that be the same though if I just refinanced?

Originally posted by @Jake Stuttgen :

@Wayne Bridenstine Thanks for the knowledgeable insight on this. I plan on using the HELOC/Refinance money to put down payments (or cash purchase) on a couple of more properties, so I was leaning more towards the Refinance because of the rate increase risk, but I definitely see the positives with the HELOC!!

@Michele B. Oh wow, didn't even consider the DTI. Would that be the same though if I just refinanced?

If you have room in your DTI you would be fine. If you mortgage yourself up to 50% then try for a new loan or a HELOC that is where you will be stopped.....but if you have the HELOC and its not being used as kind of a in case of emergencies then you will be okay if you find a great deal you could then use that money. SO what I guess I am saying is watch your DTI....Decide whether you want to have that line of credit available or if not. I personally would try to use it for the next purchase if you are comfortable with that decision.

Look at all sides of the coin. If the market down turns can you say no worries? Do you have enough to hold if you lose a renter or two and still hold the properties. I would hate to lose my home just because I overstepped. And remember if the market goes down they can take away your HELOC that you haven't used.

It's your decision and comes to what it worth to you.

Good Luck!

Just to add to the discussion regarding DTI etc. and mortgaging your personal residence. My thought would be to put as much of the debt on the new properties you want to purchase ( and maybe rehab). Meaning lower the risk to your own residence and to you personally and use someone else's money, not your own equity. I would do that by using only a small HELOC to provide for a 15% or 20% down payment on the investment house. Then get a purchase investment 30 year fixed rate mortgage on the investment house(s). The lender will give you credit for 75% of the expected or current rent to qualify for that mortgage as extra income over what you earn from your employment. The Lender will use usually a 1% a month payment off the total amount of the HELOC. Say a $50,000 heloc will be assumed one day to have a $500.00 a month payment even though today it doesn't since its interest only and at a lower rate than say a year from now when it rises each time the Fed Reserve raises their short term rate. The lender will use a 1% worst case HELOC payment in DTI calculations.

Even if it's a a house to invest in, fix and flip, why take all that equity out of your paid off residence when you don't have to most likely. If you need funds to also rehab an investment house flip there is a 30 year fixed rate loan for that , also at 15% down.

Rates are still low today so I would say use the banks money at a low 30 year fixed rate and retain the security of your equity in your personal residence. Perhaps you have savings and don't even need a HELOC at all for a 15% down payment ? Even better to have a paid off home all your own and the bank is your partner on the fix/flips giving you credit for future rent, even on a trashed , vacant home you are repairing to flip ( bank doesn't know for sure you will flip rather than rent it so they have to assume some future rent , which is used as extra income to qualify.). Examples are in my Blog of how we do this for our investor clients with the security of a 30 year amortized HomeStyle rehab loan that has no pre payment penalty.

I'm not a tax advisor (see your own personal tax advisor/CPA), but don't forget to take into account the new tax law is not supposed to allow for deductions for HELOC's any more save for a few circumstances.