Cashout refi or HELOC?

49 Replies

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!

@Marcus B Hsu I had this same predicament recently. Did a cash out for 2 reasons - 1. Rates are so low, this money is very cheap, cheaper than HELOC rates. 2. Since I've heard so many wild predictions about 2021, I would rather not let a bank make a decision of closing my account. In fact, some banks have stopped providing HELOCs so I took that as an indicator.

I have a rental in Tempe. If you are not working with an agent, I'd be happy to assist. Good luck in your decision.

I usually recommend a cash out refinance over the HELOC, especially since rates are so low right now. In many cases, they are lower than the HELOC. If it's a single family home, you're likely looking at around 75% loan to value. Usually an investment HELOC is around 80% loan to value, so they're fairly similar but with the lower (and fixed!) interest rates of the cash out refinance, it's a bit more reliable for your monthly rental income. The cash out refinance also has less fees as compared to the HELOC.

Cash-out Refi FTW! Get a lower rate on a higher balance rather than taking out a smaller HELOC at a higher rate than a 1st mtg.

You most likely would be able to take out up to an additional $110k, bringing your balance to $240k, at a rate of something like 3% depending on various factors. Speak with the MLO you worked with originally & I am sure they will work up a few scenarios for you.

My response is, it depends so gave some factors below that I would consider. I think if you plan on buying another property with the funds, do a cash out refinance. If you plan on using the funds as a line of credit, do an HELOC.

1. The HELOC rate can be lower at introductory offer sometimes 0% interest first year, but more expensive long term. So good for a fix and flip if you have the property.

2. Cash out refinance rate more likely to be cheaper than HELOC long term. Good for buy and hold (BRRR).

3.You might need to payoff the HELOC when you do a new purchase. Most banks want to have first mortgage lien on the property. Though I believe for some banks, you can have the HELOC remain open, if the new purchase is with the same bank. And if this is the case, I would do the HELOC providing I am doing a new purchase that has multi-units.

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.  

@Marcus B Hsu you will find it almost impossible to HELOC if this is not your primary residence. That is what the benefit of the cash out refi is. If its multifamily you can expect 70-75% LTV and if its SFH you can expect 75-80%.

I've been in the same shoes recently and prefer the cash-out refi. I call it the Slow Brrrr (Slobrrr?) or the Lazy Man's Brrrr. In an appreciating market, if you're able to find a decent (but not incredible) deal on a property in average shape (still qualifies for traditional financing), do some cosmetic rehabs and wait a year or two, you may find that you're still able to refi all of your original investment back.

I also like that the cash-out refi holds my feet to the fire. I'm paying 3-3.5% interest for 30 years on that money, so as an investor it forces me to find a better return for it and not be on the sidelines for too long.

@Ingryd Hernandez , @Elise Marquette , @Colin Creighton , @Carol Pennant - Thanks for the explanations, makes good sense. I feel like every time i think about this, i keep saying rate cant get any lower, and then the rate keeps dropping for refi,  but yes purpose of this is for investing more properties, so cash out refi does seem to make more sense.