HELOC vs Cashout refi

[Nathan Alvarado]

I bought my first property last year in July. I put 20% down and put a good amount towards the rehab cost. I'm thinking I should have around 104k-129k in equity. I was wondering what would be my better option to get a down payment for my next property. Either the HELOC or cashout refi? My current APR is 7.15% I'm pushing towards the HELOC because lower cost on closing costs and refi interest rates are the same as my current loan right now.

[River Sava]

Hi Nathan - Congrats on your first property

With a HELOC, you're right about the lower closing costs being a plus. Plus, it gives you flexibility as you can draw funds as needed and only pay interest on what you use. Though, keep in mind that HELOC rates can fluctuate with the market, potentially exposing you to higher interest rates down the line.

On the other hand, a cash-out refinance could lock in a fixed rate, providing stability/predictability in your monthly payments. While the closing costs may be higher than a HELOC, the long-term interest savings might outweigh this initial expense depedning on the property value, LTV, credit, etc. If the rates for a cash-out refi are similar to what you're already paying, it might be worth exploring, especially if you prefer the certainty of a fixed rate.

[Ko Kashiwagi]

Hi Nathan,

Is this property owner occupied or rented out? HELOCs are generally for owner occupied properties. As @River Sava outlined, there are pros and cons to HELOCS. If you have a proper exist strategy to pay off the HELOC, the HELOC is a great way to tap into the equity for a relatively short period of time. If you also presume the interest rate will come down the next year, perhaps delaying cash our refinance is not a bad option.

[Jay Hurst]

Quote from @Nathan Alvarado:

I bought my first property last year in July. I put 20% down and put a good amount towards the rehab cost. I'm thinking I should have around 104k-129k in equity. I was wondering what would be my better option to get a down payment for my next property. Either the HELOC or cashout refi? My current APR is 7.15% I'm pushing towards the HELOC because lower cost on closing costs and refi interest rates are the same as my current loan right now.

LOC= Short term cash needs

Fixed rate= long term cash needs.

Down payment would be a long tern need unless are buying under market value or improving value where you can refi with cash out paying back the short term vehicle like a LOC.

[Erik Estrada]

Quote from @Nathan Alvarado:

I bought my first property last year in July. I put 20% down and put a good amount towards the rehab cost. I'm thinking I should have around 104k-129k in equity. I was wondering what would be my better option to get a down payment for my next property. Either the HELOC or cashout refi? My current APR is 7.15% I'm pushing towards the HELOC because lower cost on closing costs and refi interest rates are the same as my current loan right now.

This would depend on your current LTV and the property type. If this is an investment property the max a lender will allow is 80% LTV on a cash out (if DSCR is over 1.00) and 75% CLTV on a DSCR second (if DSCR is over 1.00). HELOCs are capped at 70% CLTV

If this is your primary residence you may find a lender that can go up to 90% CLTV. However on a Cash Out refinance you will need to wait 12 months and are capped at 75% LTV for the majority of lenders.

[Colin McMahon]

Quote from @Nathan Alvarado:

I bought my first property last year in July. I put 20% down and put a good amount towards the rehab cost. I'm thinking I should have around 104k-129k in equity. I was wondering what would be my better option to get a down payment for my next property. Either the HELOC or cashout refi? My current APR is 7.15% I'm pushing towards the HELOC because lower cost on closing costs and refi interest rates are the same as my current loan right now.

If this is a primary residence I would take the HELOC. The loan amount is not going to be that large and the closing costs will be much smaller. You will also always have the option of doing a rate and term refinance in the future to refi both the first mortgage and HELOC into one loan. 

If this is an investment property it is going to be much tougher to get a HELOC due to the LTV restrictions. To get more equity out of the property you will have better luck with a cash-out.