LOC or Refi? Which is favorable?

Question

Hey Guys,

I am looking to purchase a new investment apartment soon. Is it best to pull money from a LOC or to Refi the loan? I assume the Refi is more difficult but the LOC costs more. Do banks allow for LOC on an investment property?

Thank you!

Nghi Le · Answer

If the loan amount is big enough ($1M+), I've seen hard money be as cheap as 4% interest rate. But what @Brent Coombs said is true; it'll never beat conventional. However, not everyone can qualify for the conventional, and that's where hard money falls in. The problem with cash-out refis and HELOCs is that you have to watch your DTI. Now you have enough down payment for the next deal, but the bank will say you're leveraging too much. Almost like you can never win with the bank.

Hard money and commercial loans offer more flexibility, but at a higher cost. But for some people it's worth it, especially if the deal is good enough.

Hard money and commercial loans offer more flexibility, but at a higher cost.  But for some people it's worth it, especially if the deal is good enough.

Edward P. · Answer

Hi @Brent Coombs

Thanks for getting back to me so quickly.

I am going to spend more time understanding HML as I do not understand them fully yet.

Brent Coombs · Answer

If you reckon a Refi has problems (but doable), my instinct tells me that HML should be even further from your mind!

I can't think of any circumstance where a HML loan would be cheaper than a "normal" Refi. Can you? (Or anyone?)...

Of course, everyone wants to be in first position, so it's not surprising to find HML are no exception.

Edward P. · Answer

Thanks for your response guys!

@Scott Inno The problem with Refi is I would have to pay points, closing costs and other fees(potentially). Ultimately I would like to use this money to purchase another home. Can I get an appraisal and then get a Refi? Also, from the process you are recommending how long do you suggest I wait to make each change(refinance the house at a higher value, pull your money out, then set up the mortgage as a HELOC which you can draw from as principal is paid down.)?

@Brent Coombs I completely understand the consequences of averaging the income and expenses because we will be using the money from one property or the next. Do you recommend any other processes which you have worked on yourself? I spoke to an HM lender and she wanted to be first and wants 7-8%, no early payment fees. Which I have heard HM loans are better for a quick buy, fix and flip not the traditional buy and hold strategy.

Brent Coombs · Answer

@Edward P., if you have both options (yes, that might be a relevant "if"), then the neatest loan should be a straight Refi, because your resulting cash flow is contained within one neat package of: income minus expenses, for that property.

Whereas, LOCs may end up being allocated to random deals here and there, and it might become less easy to know exactly how much each property is really costing you / earning you, so you may end up averaging your income and expenses between all your deals. That's probably not the best idea. But of course, your administration may easily be able to overcome that potential weakness. Short answer: good to have both options! Do the math. My 2c...

Scott Innocente · Answer

If you think you can get a high valuation on your refi, then that may be the way to go.  Banks will HELOC an investment property as I am in the process of setting one up for myself as we speak.  You could also potentially consider both, i.e. refinance the house at a higher value, pull your money out, then set up the mortgage as a HELOC which you can draw from as principal is paid down.

LOC or Refi? Which is favorable?

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