Which is better? VA Cash Out Refinance or HELOC?

Question

As the subject states, I am just trying to figure out which funding is the better way to go. Looking to get equity from my current residence to acquire another property. I want to rent the home I am in now and the possibly use the VA Loan again on the next property (possibly a 2 family home).

Kevin Siedlecki · Answer

@Eric DeVito - Like most questions in real estate (and life), there is no universal answer to which is better. There are benefits and drawbacks to each.

The good thing about the cash out refi is that you'll lock in your rate at today's low rates. The downside is, you've added a significant monthly P+I payment to your budget.

The good thing about the HELOC is that your payment is more flexible. You can borrow as you please, pay lower interest, and pay interest-only for however long your terms dictate, keeping more cash available for you to grow your portfolio. The downside is the rate is adjustable, and rates are pretty sure to rise in the coming years.

Your decision also deepens on your current rate. I had this similar debate with myself just over a year ago, and went with HELOC because the current mortgage was a whole point lower than the refi rate was going to be. I don't want to raise my payment by borrowing the whole amount at a higher rate, so I kept most of the mortgage at that locked in 30-year rate, and took a HELOC only on the equity.

If that rate change isn't as drastic as it was for me, then I'd say do the refi IF you have a plan in place to buy a performing asset using the money you'll cash out. If you only have a plan to use half or less of what you'll cash out, do the HELOC, or find good places to put that money from the refi, so you know you're making enough money to cover the payment and then some.