I'm a bit overwhelmed at financing options and timelines

[Tom Horn]

First time investor here. I'm looking to buy a long term rental property about 1.5 hours away from where I live. I'm wanting to buy this summer, so about 2 months from now, and I'm trying to explore my financing options now so that I can jump on a deal if/when I find one. I own my current home outright, which has a value of around $250k, and I have $25k cash saved up. Here are the options that have been presented to me.

1) Some lenders I'm talking to are trying to convince me of a HELOC, but I don't really like the variable interest rate. I don't like the idea of of take a roughly $125k loan on a variable interest rate.

2) I asked about a traditional/conventional loan, in which I put down the $25k of my own money, and then financed the remaining amount on a traditional mortgage. One lender tried to tell me that my interest rate would be higher by doing this, and that I should try option 3.

3) Some lenders are trying to convince me of a cash out refi / home equity loan (I'm still fuzzy on what the difference is between them). The benefit of this is that I would have the money in my account, and it would allow me to make a cash offer on a house. However, I don't like the potential scenario in which I take out the loan, start shopping for houses, and don't really find any good deals. Then, I have this $125k loan that I'm just paying for every month out of pocket.

I'm leaning towards option 3, but how can I do the timeline here? How long roughly does it take to close a home equity loan/cash out refi? Could I go "make a cash offer," then immediately run to my bank and secure the loan (because I will be preapproved)? What is the timeline on that?

Is there any other advice that yall have for me in how I approach this?

[Jonathan Bombaci]

@Tom Horn The refinance option isn't a bad one and to minimize your risk of taking a loan you cant use just start the refinance process but wait until you have the investment property you want to buy under agreement before close on the refinance. We do this a lot with our investors. They'll get the paperwork to the bank for the refinance we'll schedule it to close 45-60 days out then start aggressively shopping for the investment property. If they find something and get it under contract with the "CASH" that is coming (still a CASH offer in my book), boom go ahead and move forward with the refinance. If you get a good attorney involved they could even do a double closing. If you don't get something under agreement then just try to push the closing date of the refinance out as far as you can without incurring additional fee's. Be open an honest with your lender about this so they don't do an aggressive rate lock to help you out and actually end up screwing you by mistake. 

Full Disclosure you could end up in a situation where you incur some significant sunk costs (appraisal, loan origination, etc) have to make a decision to close on the refinance or kill it and pay the sunk costs and you don't have anything under agreement.  It's up to you if that's an acceptable risk or not. 

The other thing I'd suggest considering is buying the property as a vacation home. You can get 10% conventional financing on a vacation home with Fannie or Freddie as long as it's in a vacation destination and more than 100 miles from your primary residence. There is no rule about you renting it out to short term rentals when you're not using. Again we do this pretty regularly with investors we work with in Greater Boston who are looking for a vacation rental on Cape Cod or the Beach in Maine, or up in the Mountains or NH or VT. They use the property as a short term rental 48 weeks out of the year and use it for themselves the other 4 weeks. In my opinion it's the best of both worlds.

I hope this helps,

Best,

Jon