Rental Property Investor · Saratoga Springs, UT · Member since 2020 · 22 posts · 7 votes
So I'm having some analysis paralysis with looking at a Cash out refi vs a HELOC on my primary residence.
To paint a picture, living in a townhome and will rent it out when we move in 2-4 years. I want to take advantage of the equity and invest in a property. I can do a cash out refi and increase my payment nearly $500 a month or I can get a HELOC.
The HELOC is appealing because I can use it when I find a deal and I only pay back what I use. But it also seems very risky to borrow against my primary residence. On the other hand, the cash out refinance would increase my payment to a point where I would cash flow only $100-$200 when I end up renting the place and moving out.
Anyone have experience with either? Do you prefer one over the other?
I love this question. In my opinion it boils down to how fast you can deploy the funds and how much equity you have. As your primary residence if you have a little equity but don't have plans to deploy it right away a HELOC is the way to go and is very cheap to open and in most cases I have seen HELOCs on primary residences can be pretty favorable LTV (80-100%). For instance I did one at 100% LTV through a local credit union. If you have a ton of equity but you know you can put the money to work right away and earn MORE than the additional costs to your current mortgage payment then go with a Cash-out, but its more costly for the closing fees and will leave some more money locked up in equity because the refi is usually a lower LTV (like 70-75%). The alternative option, if you have a bunch of equity, is to do both. I did this on an investment property though not a primary. I was able to do a Cash out refi to the max level I was comfortable with while making sure the rents would cover the new payment and I would still cashflow what I needed to. For the balance of equity tied up in the property I utilized a HELOC to gain access to up to 80% LTV. So, while I still have some equity locked up in the property, I am tapping into as much as I can and I immediately deployed the cash out money for some debts and now I use the HELOC money for investing. Good luck!!
I love this question. In my opinion it boils down to how fast you can deploy the funds and how much equity you have. As your primary residence if you have a little equity but don't have plans to deploy it right away a HELOC is the way to go and is very cheap to open and in most cases I have seen HELOCs on primary residences can be pretty favorable LTV (80-100%). For instance I did one at 100% LTV through a local credit union. If you have a ton of equity but you know you can put the money to work right away and earn MORE than the additional costs to your current mortgage payment then go with a Cash-out, but its more costly for the closing fees and will leave some more money locked up in equity because the refi is usually a lower LTV (like 70-75%). The alternative option, if you have a bunch of equity, is to do both. I did this on an investment property though not a primary. I was able to do a Cash out refi to the max level I was comfortable with while making sure the rents would cover the new payment and I would still cashflow what I needed to. For the balance of equity tied up in the property I utilized a HELOC to gain access to up to 80% LTV. So, while I still have some equity locked up in the property, I am tapping into as much as I can and I immediately deployed the cash out money for some debts and now I use the HELOC money for investing. Good luck!!
I think Dan makes some great points in his post above! In my opinion, if you need instant cash for another deal you have lined up, I would proceed with a cash-out refinance and have that cash on hand. If you're casually searching and you don't know how much money you'll need or when you'll need it - use that HELOC! Cash-out refis you can take 75% of value out and HELOC's can be as high as 90%!
@Dan Milinazzo Thanks Dan, this is really helpful! This would be a scenario where I'm searching for a deal out of state, so I'm not quite sure where I'd put the money yet, so maybe a HELOC makes sense
@Drew Blakely Thanks Drew! Yeah I agree. With my situation I'm still looking for where to invest since I'll most likely need to go out of state. So maybe a HELOC makes more sense?
I'm closing on my 1st property soon and find myself asking the same question (Cashout vs HELOC). I plan to live there for 1-2 years then buy another property as my primary. What is the minimum equity required for both? 20%? Also, do you plan to have another appraisal done prior to refinancing or HELOC?
With home prices raising all over the country and especially in California, I've realized several hundred thousand worth of equity in my primary residence and was debating the same question. I have a friend who is a loan officer explain that for the cashout refi I'd be paying $30k in unnecessary closing costs and losing a relatively good rate I currently have just to take cashout at 80% LTV, whereas just like others have posted here the closing costs for a HELOC are next to nothing, and you can get much closer to 100% LTV. That worked better in my scenario because I didn't need all the cash at one time so a HELOC became the obvious best solution to draw funds over time.
Also, when you analyze the risk of borrowing against your current primary residence as long as your ROI (5,10, 15% for example) will beat the cost of borrowing the funds (4% HELOC) you should come out ahead. In fact, you may find that you can borrow from your 401k at a cheaper rate then your HELOC if you need additional funds and its a much quicker process! Just don't forget to add these costs into your BRRR calculator so the numbers are realistic.
Great conversation here. Not sure if you ended up choosing one over the other. With the steep rise of interest rate in the past couple of week, your numbers would have looked very different.
I had a similar thought end of last year, so what I ended up doing was:
1. Refinance my primary home. But only because I got a lower rate, and it lowers my monthly payment. Got 75% LTV, and used that money as down payment for a duplex that I will live in as my new primary home. At that time, I did not know what exactly I was going to use that money for. I was open to purchasing a SFH, duplex, as investment or primary. Either way, I knew that I wanted to rent this out. So I don't mind resetting my loan. This way the numbers look really good once I have it rented out.
2. A few months later, I decided to do a HELOC on the rest of it (80% LTV). In other words just additional 5% of the equity. I had plan to use this in case I find a property to force appreciate. I would only use this HELOC if I have an exit strategy (refi knowing that the property has appreciated).
I guess in short, it all depends on what strategy you have in mind. I opted for the strategy above because I didn't know how things will play out. And I didn't know what deal I could find. Maybe because I am a new investor, I don't feel comfortable taking out a HELOC unless I have an exit strategy.
I think consulting with a mortgage broker might also be a good idea, so you are not limited to just those two options (cash-out vs. HELOC). Maybe explore rates for FHA, or ARM?