HELOC or Cash Out Refi: opinions?

Question

Hey BP,

Here is my situation, I own a F/C property - value 55-605

I just found a local bank that will give me a HELOC at 4.5% for 10 years at 70% LTV.  Another option is to get a portfolio loan with them at 6% for 30 years fully amortized @ 70% LTV (no seasoning req.).

My current strategy is to buy in cash and then do a cash out refi with the portfolio lender, get most of my capital back then rinse and repeat.

Considering I have access to lending, it seems that it would make more sense to not get a HELOC and just go for the cash out refi.

Anything I am overlooking?

I should also mention, I am a buy and hold investor.

thanks!

AG

Kyle Meyers · Answer

Also consider the different tax implications, the taxes can get very complicated on anything other than a purchase loan. There is a discussion about this here: http://www.biggerpockets.com/forums/51/topics/72853-appraisal-fee-deduction

Jeff Thompson · Answer

Talk to banks and see what their requirements are, Banks vary in their requirements.

For Tri Counties bank in northern CA I was told they'll do 10 portfolio AND 10 Fannie Mae loans. On The cash-out refi the portfolio's are no seasoning 70% LTV (appraisal done right away) at 6.5% with 2 points. Fannie Mae's are 6 month seasoning  75% LTV and 4.5% (with no points, varies by points paid). Furthermore they'll count income from recent rentals if you have two years renting experience - this may only apply to portfolio loans, I'm not sure.

If the Loans is under $50k the bank may say your only option is portfolio (or no option), I think it varies by bank if they'll do loans under 50K as they aren't very profitable for them to sell. I'm able to get "good faith estimates" online of loans under 50K (aimloan.com works) but I haven't tried actually applying and seeing if it would really go through.

HELOC till 6 months(or possibly one year) is probably a good choice vs portfolio refi, then lock in these historically low rates if you want to hold long term.

Arthur Garcia · Answer

After look over my options and hearing the feedback here on BP, I think the best bet is to get a regular cash-out refi.

Kevin Amolsch brought up a good point regarding the way the HELOC will affect my credit.

Thanks for all the input!

AG

Kevin Amolsch · Answer

Although your strategy is not a bad one there are some pitfalls I want to point out.  Arthur was correct when he said get most of your money back with a refinance. Unless you season the title (sometimes 6 months but mostly 12 months) you will only be using your actual costs as the value.  You should get 70% of your money back with the refinance.  If you season the title you can use the new appraised value and get all of your money back.  One thing many of our clients is doing is to use hard money to purchase and rehab a house and than do a rate and term refinance to pay off the hard money loan.  Obviously this is more expensive but will enable you to do more deals if money is a limited resource for you.

Chris H. · Answer

I'm in this situation too...I only owe 30k on my house, at 5.5%.  I have a 40k HELOC available (free service from my bank).

I can refinance to FHA, 3.8%, and take 40k cash out, less 3k closing.  Lower interest...but paying interest on more money.  Trying to decide if I should do this!

I intend to do the same thing- buy houses cash, then refi.  It is occurring to me, though, that if I cash-out refinance, I'm paying interest all the time- if I buy houses on the HELOC, I'm only paying interest for the one month I have the money borrowed.

Kevin Amolsch · Answer

Often times a HELOC has a variable rate and as already mentioned a shorter term.  The advantage is you have access to the money but are not required to use it and pay interest on it.

A fully amortized loan has some real upsides, especially in today’s market.  You will most likely lock in a really low rate for 15 to 30 years.   My guess is you will also get more cash with an amortized loan.  Finally a HELOC will most likely show on your credit as a revolving debt so it will be classified in the same category as a credit card.  This is not necessarily bad but if use the line it will could negatively affect your credit scores.  A large portion of your credit score is calculated by the amount of revolving credit you have available compared to how much you use.  So if your credit cards are maxed out it lowers your score.

Both have their advantages and disadvantages so the best is really going to be based on your risk tolerance for interest rate movements as well as the other items I mentioned.

Arthur Garcia · Answer

Andy  Chu - yes, 10 yr interest only, but then it reverts to an aggressive amortized loan (don't know the details yet, probably should get those :( .

Andy Chu · Answer

Typicallly Cash out refi's have higher costs. Origination fee, Closing costs, Title Fee, and etc. HELOCs can oftentimes be done for nothing. You stated you are are a buy and hold, so I'm assuming cash flow. Is the HELOC an Interest Only 10 Year balloon? I like that option quite a bit because its interest rate is 25% less than the others and presumably lower fees.