Cash out Refi or HELOC??

Question

Hello everyone,

I’m looking to acquire my first property I plan on going through either a HELOC or Cash out refi to fund the deal.  I recently purchased my primary residence late December in which I ended up putting down 20%.    The residence I currently live in I also want to turn into a rental within the next two years as well in reason is because I plan on moving to a different state.  Thank you for checking out my post any advice/opinion  will be appreciated!

Torrell Palmason · Answer

Hey @Alex Song, I agree with @Tim Johnson that a cashout may not be a viable option for you at this time. However, with a HELOC you can go up to 90%-100% CLTV which can give you some more leeway. At a CLTV of 90%-100% be aware rates will be higher but they are interest only during the draw period.If you are curious on Second homes then I had just written up this post yesterday "Second homes are restricted to 1 unit properties, must be suitable for year round occupancy (the way I interpret that is STR is acceptable as you can schedule yourself to stay whenever), Must not be a rental property (LTR is out of bounds), you must occupy the property for 14 days out of the 1st year, and cannot be managed by a property manager. This leaves a lot of opportunity out there for you to get into a great market."Best of Luck!

Jon Kelly · Answer

@Alex Song it depends what you plan on doing with the funds.

HELOCs are great for short-term opportunities (less than 12 months). For example, if you want a BRRRR type property: purchase with cash, rehab and then refi. The interest rate on HELOCs are higher than an average mortgage, so you don't want to carry a balance on a HELOC for longer than you have to.

Cash out refi is great for long-term opportunities. If you plan to buy a turn-key investment property and want a 30-year mortgage on it, then your cash out refi funds would be perfect for the down payment on this property.

Torrell Palmason · Answer

Hey @Jon Kelly,I don't know where you are getting your HELOC's but my starting rate on the HELOC I have is 3.49%. This is an adjustable rate so I expect it to change but I am not not mad at it :) Cashout for me right now would be a much higher rate with a much higher payment whereas HELOC is Interest only for the first 10 years. I only pay on what I use, I find this much more favorable towards me.Best of Luck!

Tim Johnson · Answer

Hi @Alex Song, welcome to the forums.....

Whether you're doing a cash-out refinance, or getting a HELOC, those instruments are dependent on the present equity you have in your property. I may have misunderstood your situation, but if you just recently (last December) purchased your primary residence with 20% down, it wouldn't appear that you have that much equity to date. Is that the mortgage that you're planning to refinance? With a cash-out refi you can typically take out only 70-80% of your equity. Interest rates have jumped considerably in the past few weeks, and cash-out refi rates are usually a bit more than standard rates to begin with. It doesn't sound like a very viable option to me. Help me understand if I'm missing something here?  At any rate, good on you for thinking and planning...

Jocelyn Kaufman · Answer

Awesome, what state are you planning on moving to?

I have done a cash-out refi before to buy another property and it is pretty straightforward. It mainly depends on how quickly you will be able to pay the loan off. With the HELOC you typically will have a higher interest rate and will have to pay it off quicker. If you do a cash-out refi it is just like you are restarting your loan at a new price.

I hope this helps!

-Jocelyn :)

Jon Kelly · Answer

@Torrell Palmason that's a fantastic rate! My short-term comment doesn't apply in your case :)

Typically, I've seen and heard HELOCs of 6%+

Alex Song · Answer

Hey Tim,

Yes you are pretty much spot on and yes it doesn’t seem like a viable option at the moment in totality it was my plan as far as funding but originally I wanted to get enough where I can use a vacation loan in which I know it requires less of a down payment.  In regards I know you would have to stay at the property for a certain amount of the days throughout the year.  My heart says apply and see what happens but my head says wait because I’m not ready lol.  Thoughts?

Jocelyn Kaufman · Answer

Yeah I mean you can always pay your loan down if you refinance and worst-case scenario you have a 30-year loan at a reasonable interest rate if something falls through.

Yes, I mainly invest out of state in Montana.

Alex Song · Answer

Hey Jocelyn,

I plan on moving to AZ mainly just for a change of scenery.  But with the HELOC a thought for me was to get a STR in AZ funded through that and in a couple of months cash out and refi to pay back the original HELOC.  My mind is stuck lol at the same time it feels like the cash out refi might be best suited for the process.  Do you have any current properties out of state?