HELOC or Refi to finance?

Question

With the low refi rates out there, I'm wondering if this is now the better option to finance my first time rental property.  Needing $40K for the DP, if I use my current HELOC with a 3.75% rate (assuming it says around this) it seems I would be cheaper to do the refi at 2.75%.  I know the closing costs could bump the refi payments a little when spread out over the term. The big question is the 5yr draw period on the HELOC would be a lot less until that period is over.  I know I've read that you use the draw period until you can refinance the investment property and take the money out of that to pay off the HELOC, but I would be afraid that when that time comes, the rates most certainly will be higher than they are now and I will not want to refinance the property.  The numbers are below for more analysis.  Thanks for any and all input.  I honestly have no idea which route to take on this.

Greg Worzalla · Answer

@Jaysen Medhurst, numbers will look like this:

$40K HELOC (assuming the current 3.75% doesn't wildly in 15 years)

5 years @ $134/mo (draw)

10 years @ $405/mo (repayment)

$40K Cash-out Refi (does not factor in the closing costs, currently looking at my current mortgage bank and personal credit union bank)

$331/month more than my current mortgage payment

I will be walking through the properties tomorrow to get an idea of maintenance/repair costs and other details, after that I will analyze the deal closer to see what kind of income I can divert to repaying the HELOC back sooner.  Thanks!

Jaysen Medhurst · Answer

No numbers posted, @Greg Worzalla.

I like HELOCs, as long as you can keep them short-term. The lower fees, quicker time frame, and flexibility make them very attractive. If it's possible for you to quickly repay the $40k through rental cash flow and maybe kicking in a little extra each month, that's a great option.