Cash out refinance or stay on HELOC?

Question

Cash out refinance now or stay in HELOC?

Hi all, I'm kind of at a crossroad on how to proceed?

So, finally got my 1st property a few months ago. Used a HELOC and paid all cash, $150k. Fixed up the house and have put it up for rent now.

My current HELOC rate (variable based on current rate) is at 5.9% (Oct, Sep), was 5.2% (July). This equates to about $880 a month for the last 2 months.

I checked with my bank to do a cash out refinance in this property and they quoted me 7.5% for a 30 yr, making payments at $1200 a month and 6.5 % for a 15 yr, making payments at $1400 a month!!!

This is for a loan value of 170k.

Also, I have to pay up first for appraisal and closing costs which is coming up to about just under $6000.

I keep hearing that interest rates are not going to go down any in the best 3-4 years?

What would be the best approach in this case?

-- Continue on my HELOC and hope payments don't get bad?

-- Do the cash out refinance and I was thinking pay some extra and buy down the rate to 5% or so?

IDK...not sure where the best approach is?

Jay Hurst · Answer

@John Maxx The key is to understand what your HELOC is based (the index) on and what your margin is. For example, a lot of HELOC's are based on prime and then have a margin which is a number either +/- from your index. For example, if your rate is based on prime + 1 it will be 7.25% next payment. Prime is expected to keep going up as well.

Zach Wain · Answer

@John Maxx - since you have a variable rate HELOC that will go up further as the Fed raises the federal funds rate (which is what prime is based on), I recommend you get into a 15-30 yr fixed now. Yes there are costs associated with doing so, but your HELOC is only going up and I assume you want that paid off so you can use it again for another purchase???

John Maxx · Answer

@Scott E., You're right. Last 2 months, prime was 6.25%, yet my rate showed as 5.9%. Seems like I'm a little lesser than prime. I called my bank to ask them what my calculations for rate are, as I remember saying I had some benefits, etc. Also, I'm a newbie investor. Put in lot more than I should have for renovations. It's on the market for rent. I am not going to be cash flowing even after a renter in there, sigh :(Overall, I'm still planning to keep it for long term hold. Hopefully, I'll find a good strategy for this in the next few months. As most adviced, I think I'll stay on the HELOC for now and the refi when it comes down. Lots of lessons learned with this first rental. Also, timing didn't help, as rates are all super high now. Definitely will be watching out for a lot of things in the next rental. Thank you everyone for their feedback and suggestions. Any more ideas on this situation are welcome!

Doug Coup · Answer

@Brian Ellis depends on your obective too. If rents at these new rates cashflow and you can pull cash out to pay heloc off. Then you have cash for next deal. You created a self sustaining asset that produces. Income. And depreciation. And long term appreciation.Having a heloc is great for writing cash offers. I would get back to that if you plan on moving on to the next property search.

Dave Skow · Answer

@John Maxx- 1) is heloc on your present primary home and not on the new rental ? I assume so 2) a heloc at 5.9% rate seems unusually low ..if this is accurate - this is a great rate 3) is the $880 payment for the heloc an interest only payment or is this a full amortized payment ? 4) is the bank you received quotes from aware that the property is a rental and also aware that you purchased the property for 150L a few months ago ? ( these items will affect pricing and some lenders will only allow you to borrower 75% of what your aquistion rice was ) 5) you didnt mention the loan fee ( points ) for the 2 options you outline ..what are these? 6) buying the rate down to 5% on a rental property cash out refinance will be very very high loan fee

Jay Hurst · Answer

@John Maxx Some HELOC's have a fixed rate period before adjusting. You should read your note as it will lay out the details.

Brian Ellis · Answer

I think everyone is overlooking the deal itself. The question is what is your return on investment with a cash out refi?If it’s stable and rented, and you can still cash flow at a comfortable number, I’d say cash out refi now. Plus you will be able to invest in more assets. Rinse and repeat. Again, it all depends on your return after a cash out refi.

Scott E. · Answer

In your original post you say your rate is currently 5.9%. But then a later post you say your rate is prime + 1.WSJ prime rate is 6.25% today. Meaning your current rate is actually 7.25%.Even with that being said, I'd stay in the HELOC if I were you. Your rate will highly likely continue to rise over the next 6-12 months but eventually rates will start to come back down.When rates do start coming back down at some point, you can decide if you want to hang onto the HELOC or refi out into a fixed rate at that point. Just doesn't make sense to pay all of those closing costs now, when you're going to want to refi again when rates inevitably drop in a few years (imo)

Jay Hurst · Answer

@John Maxx It is pretty much consensus that prime will reach 8.5%, after that, who knows. Does it keep going up or start to drop at that point or hang out there for a while? That is the trillion dollar question. But, i will add this: One of the great advantage's of a line of credit is that it can be used over and over. So, I generally suggest you pay off variable line of credit debt with long term debt so you can use the line of credit again. If you can pick up a good deal down the road using the line of credit again, as compared to have it tied up in the first property that is worth maybe a bit more interest if prime comes down a bit next year.

John Maxx · Answer

@John CarboneThank you for your input! Everyone I speak to and research say rates are only going to go even higher. This is the first I'm hearing that rates could go down. I think we'll just have to see.