Cashout refi or HELOC?

[Marcus B Hsu]

I have an investment property in Chandler AZ

Appraised value $300k

Loan current balance is $130k, at 4.25% 30 yr fixed.

I put 25% down back in 2015 for it, and has just been going up since then.

To invest in more properties...

Would you do a cash out refi or HELOC ?

I've thought about selling and 1031 to more properties, but dont think it makes sense to sell a property that is cashflow +ve, in a good location, and have great tenant.

Thanks in advance for the advice!

[Brad Prahl]

I did a HELOC for one of my properties instead of a cash-out last year. Since everybody else said the cash-out refi option, I decided to tell you why I chose a HELOC for one of my properties. Hopefully, it gives you another way of looking at it.

A line of credit for ~225k (75% LTV) is for all intents and purposes the same as cash. This line of credit will still allow you to pay cash for flips or a BRRRR strategy. For example, buy a 100k house with the line of credit and either flip or use it for the BRRRR. The house is now worth 130k. If you treat it as a flip and sell or refinance using the BRRRR philosophy, you put the proceeds towards paying down the HELOC. The flip option pays off your HELOC, with the rest being straight cash in your, and the BRRRR method will allow you to pay off nearly 98k of the HELOC (using 75% LTV for the refinance). Now you have nearly your full 225K still in your line of credit that can be used again while still having the cash flow and payment on your first house.

Everybody is correct in saying the interest rate for the HELOC will be higher than the refinance, but the great thing bout a HELOC is you are only charged interest on the amount you draw out. Meaning if you have only taken out 100k of your 225k HELOC you are only charged interest on the 100k. For the refinance, you would be charged interest on the new balance of 225k (75% LTV). My bank also covered all closing costs if I don't close the account for at least 3 years, so my only upfront cost was the appraisal fee.

Either way, you are in great shape. I eventually went with the HELOC because I didn't want to permanently increase my mortgage payment by doing a cash-out. The interest rate may be a little higher, but if you use the BRRRR strategy or do a flip correctly, you won't have a high balance on your HELOC, so your interest costs will end up being lower than that of the refinance.

A little bit longer post, and hopefully, my hypothetical math made sense and this helps you come closer to finding an answer that works for you.