Best way to pull equity from home

[Lori Edelman]

Hoping to get your input into a debate between my husband and I.

We purchased our home 10 years ago at a fairly low rate, and our realtor thinks that we can rent it for about $500-$1k more than our monthly payment/expenses! That’s pretty good here in northern NJ, where it’s much cheaper to rent than own with a typical mortgage. The house will be paid off in about 4 years, at which point, our monthly cost will drop and we can rent it for about a $2500-3k profit (capex/maintenance and rent appreciation aside).


I would like to rent our house out and take out a HELOC (about $500k-$600k) to purchase more real estate, including a multifamily for us to live in using new Fannie Mae program. This way we ultimately would wind up with our current home, a multifamily, and perhaps a few other out of state rental properties and we'd even have income coming in from our current home.

My husband doesn't understand why we would keep our current house. He prefers to sell it and use those funds to buy the other properties. I explain that at the end of the day, we would wind up owning our current house in addition to the ones we are buying - more wealth/equity - but he doesn't see it that way. He doesn't understand why our house is so special that we would want to hold onto it. He wonders: if my strategy is a solid one, then why wouldn't everyone then just buy a home and then take out a HELOC against it rather than using their funds to buy the properties they want. I explain that people do do that, but since we already own this home, it makes sense to keep it and take my approach.

Obviously there are costs to selling our house and we have a low rate locked in, but he doesn’t want us following my strategy simply because we would be avoiding selling costs and getting a better rate (we only owe about $95k on our house so rate isn’t a big factor).  

SO, what do you think?? To A) keep, rent, and take HELOC on the current house to buy our next properties or B) sell the house and use funds to buy our next properties?

[Lori Edelman]

Quote from @Jon A.:

If you don't have a plan or way to pay the HELOC back I would not do it. You will probably end up refinancing the new purchases anyway to pay the HELOC back at some point. So you may as well just do it now. You also have to factor in that your HELOC being maxed out will affect your credit and DTI. Buying another home with a maxed out line of credit may prove to be an issue. Maybe a lender will chime in on that point. HELOCS are also tied to a variable rate that you have no control over. I would consider a cash out refinance to get those funds. Then, that money is yours. It will reset the amortization of your current loan but it all depends on what your goals are and how quickly you can achieve them.

Thanks for the feedback! Very helpful. I figured that the HELOC would be paid back using rental income, but you are right about it coming with its own down sides. I think that some HELOCs are actually interest only until they are due after a number of years. It was attractive because of the flexibility involved - borrowing what you need as needed. The thing about a cash out refi is that you have to borrow a set amount. Not worried so much about the rate because we don’t owe that much.