Cash out refi or HELOC for new purchase?

Question

I realized today that I need some more savvy friends for pinging scenarios off of! I live in Portland, OR. I'm wondering if you'd be willing to give me your two cents on this. I'm going to include specific numbers. And maybe this will be helpful for other who face a similar choice!

GOAL: I want to purchase another income producing property in about 6-14 months from now (depends on market and my energy).

I don't have a downpayment.

I am refinancing one of my rentals and was planning on using a cash out refi for the downpayment on the new house (as I have done twice already to buy two other houses - both great choices!).

Then I thought maybe I should leave the equity in and take out a HELOC instead later. Reason being that I might not touch the $75k cash out for up to a year and It's going to cost me $337/month extra so why pay for that? Why not wait and only take it out once I'm ready.

If I do a HELOC they will loan up to 80% w no closing costs. So up to 116k (based on my appraised value of 500k).

If I cash out now w loan at 3.5%:
75k cash out (337/month)
+ $25k HELOC later if I want to go up to 80% (170/month)

Of if I wait and do a HELOC later for 116k It'll be about $800/month for a 20 year payback at 4.875%

My concerns with the HELOC are that the rate is variable. Though I can lock it in (at a potentially higher rate 6% later) And also I don't know if their appraisal will come in the same. Some unknowns there. Or if my DTI will work by the time I apply.

But if I go w a HELOC that also means I can do a non-cash out refi on my rental and that means lower rate and monthly payment of 1600/mo forever at this great rate, so I'll be saving that to offset the HELOC payment.

Lots of variables and "don't know the future" in this one!

If I do the cash out refi I may end up paying each month for a loan I'm not using and have a high payment for the life of the loan (and losing the cashflow) but it seems sure and safer.
If I do the HELOC, I might end up paying more later on, however I'll save on the rental payment being lower and have more flexibility .

Anything I'm not aware of or perspective you see which might help? I'd be grateful!

I am in the loan process already (appraisal just went through) so I need to decide quickly what I'm doing.

THANK YOU!

Robin

Jaysen Medhurst · Answer

@Robin A Jackson, how long would you need the money for? That's really the deciding factor. Remember, with a HELOC you only pay interest on the money you're using, while you use it. Most are also IO for some period of time (confirm this). So if you can pay it down faster, the minimum actually goes down each month. Unlike a refi where you're committed to the same payment each month even if you're only using $100.

The fact that you're not sure what you going to use the money for yet is another point for the HELOC.

How much better will your rate be if you refi? What are the closing costs?

Feel free to DM me if want to hash some of this out.

The fact that you're not sure what you going to use the money for yet is another point for the HELOC.

How much better will your rate be if you refi? What are the closing costs?

Feel free to DM me if want to hash some of this out.

Robin A Jackson · Answer

Thanks @Jaysen Medhurst I'm going to DM you! I so appreciate it!

Robin A Jackson · Answer

Hi @Jaysen Medhurst thank you for your reply and input! Means a lot. I bet this comes up a lot. I watched the video by Brandon on it just now.

So you are suggesting going w the HELOC, given your two conditions?

FYI the $800/month payback is based on the variable rate. I feel uneasy about that, and I agree I don't think they will go up anytime soon. I guess If I end up having this for 20 years (I hope not) I'd have to manage it if rates went up.

The prob is I'm not sure what I'm going to do w the money yet - if it'll short term or not. I might want to purchase a home to live in, in which case I'd leverage the home as well (1-2 other units, rent rooms). But then I'd be stuck w the HELOC payment on top of the mortgage unless I can refi it enough to pay that and the rehab costs off.

If I do that or BRRRR, I guess I'm not sure how I'd pay off the HELOC AND any rehab costs with the refinance of the house. That would need to be a HUGE jump up in value to cover both of those (Say $100k HELOC and $75k rehab) on top of the existing loan payoff.

My portfolio can handle a bit of debt service - but I'd really need it to be covered and then some by additional net income coming in.

I guess the prospect of the Cash-out refi seems less risky as It's just 337/month and only $52 more than what I'm paying now on that property due to the lower interest rate now. So for just $52 more a month I get $75k. But in fact I'm losing the 337 I'd be getting for 30 years on that loan!

But the HELOC feels less tied down and less committed which is nice.

I feel like a ping pong match in my head over this!!!

Any more input based on that? Thank you I appreciate it!

Robin

Jaysen Medhurst · Answer

@Robin A Jackson, this question comes up a lot on BP. You have a very good grasp on the pros and cons of each approach, so no need to retread that ground.

I generally think that a HELOC is the best way to go with two conditions:

• The money is for relatively short-term use (perfect for flip or BRRRR).
• Your portfolio can easily support the additional monthly debt service.

The higher interest rate in nominal and realistically, rates aren't going to be shooting up anytime soon. I don't see that as a very substantial risk.

Cash out refi or HELOC for new purchase?

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