Help! Advice on Cash Out Refinance or HELOC or ??

Question

Our main home appraised for $500k, and we owe $100k. 12 more years on a 15-year conventional loan and pay $850 a month. We want to begin to begin the BRRRR process, but want to allow our equity to work for us in the best way possible. Options we've been given are -

1. Cash Out Refinance of $300,000 at 30 years, 3.625%. Pay off the existing $100k mortgage and have $200k for investment properties. Our current per month mortgage is $850, and this would increase to about $1400 per month. We DO have a current investment property that we've got under contract for $150,000 and will have a 25% ROI.

2. Or we could HELOC at 5% the $150k and then figure out how to refinance after 6-months to a year.

With our current equity in main home, what is the best route if we'd like to BRRRR invest? Is there another type of loan we're missing out on with a Portfolio Lender? Any Nashville recommendations?

Thanks! Luke

Andrew Postell · Answer

@Luke Myers I have been wrestling with this response a little because I feel that the lender you are getting these numbers from should 100% be able to answer these questions.  If they don't know how to show the pros and cons to loans they offer....then it has alarms going off in my head.  But I'll assume the best here and just answer these as best as I can...

HELOCs - I prefer HELOCs very much.  They have lower closing costs, you don't pay interest unless you use them, you use them, pay them back, use it again, it allows you to keep your current loan in place, etc.  Lots of good things.  However, two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

So when using a HELOC, it's important to have a strategy to PAY IT BACK. If you can pay it back each time you use it then the HELOC is a very powerful investment tool.

Refinancing - you can refinance immediately to pay that HELOC back.  Did someone tell you that you have to wait 6 months to 1 year?  If not, no worries but you can refinance right away, no waiting.

Anyway, that's the short and quick about it.  Let me know if you have any other questions.  Thanks!

Luke Myers · Answer

Thanks to both for your comments. For the HELOC - I was told by both a mortgage company, and a local bank, that we'd need to own the property for 1 year before refinancing - but seems that may not be accurate. Perhaps I need to shop that some more.

That's a good point about mixing personal and business. The reason I was drawn to the cash-out refinance at first is because 3 years ago, I chose the 15-year loan but the payments are high enough where we don't have a lot of extra money to invest....so rates are lower now where it seemed refinancing to a 30 year loan would open up more options for aggressive investing.

And since we have an investment in place (the $150,000 deal with 25% ROI) - would it not be prudent to just do the whole deal up front knowing that we've refinanced the original loan to a 30 year, and have used our equity to secure a lower interest rate on the additional $200k loan?

Doug Smith · Answer

Hi @Luke Myers. I would think twice about mixing "business and personal" in doing the cash out refi. You will be able better separate the interest expense on your investment property if you do it with a separate loan/line. I agree with the previous response. I was a lending exec for 25 years and made hundreds of HELOCs in my career for real estate investment purposes. It's not a long-term solution for a rental property...you would want to refi it if you are holding the asset, but having a HELOC does allow you to jump when you need to but keep it separate from your personal finances. I hope that helps a bit.