I have been speaking with several lenders and each seems to have a different opinion. My goal is to access the equity I have in my private residence to add to my cash reserves in order to use this money to invest. Selling/renting is not an option I want to consider right now. One lender is suggesting a HELOC so that I can stick with my current healthy mortgage which is 3% and only has 19 years left on the term. The other is saying a cash out refinance is better (current rates ~6%, new 30 year) because it will look better to lenders for future loans based on not having a variable rate and also suggests that appraisals come in lower for HELOCs versus cash out refi, thus lowering the amount of cash I will have access to. I'm leaning towards the HELOC. I know there's a difference between thinking like a homeowner and thinking like an investor but I can't shake the feeling that increasing my mortgage term 11 years, increasing payment almost $400, and essentially wiping out the amount of my payment going towards principle is a bad strategy but I'm hung up on the suggestion that a HELOC will look less desirable to lenders looking at my DTI and cash reserves for future loans. Thoughts?
Whoever is telling you to refinance I would say is on crack vs a HELOC.
While it may look better, why pay a higher interest rate. Also with a heloc your only paying when you use it. If you do cash out refi and $ were to sit in bank account you are paying interest on unused $
Whoever is telling you to refinance I would say is on crack vs a HELOC.
While it may look better, why pay a higher interest rate. Also with a heloc your only paying when you use it. If you do cash out refi and $ were to sit in bank account you are paying interest on unused $
Second, it's difficult to give you a solid answer without knowing all of the pieces of your financial profile. You'd have to weigh the risks of both and select what you can stomach.
I do want to add, getting a cashout refi right now isn't the worst idea, despite the higher rates. Rates will come back down as we enter this recession. Also, I've seen them drop this past week since we've cooled off from the FED announcement. Accessing the equity now and temporarily paying more each month is a risk you'll have to take. Use your cash out capital wisely and beat the interest rate on your primary.
Second, it's difficult to give you a solid answer without knowing all of the pieces of your financial profile. You'd have to weigh the risks of both and select what you can stomach.
I do want to add, getting a cashout refi right now isn't the worst idea, despite the higher rates. Rates will come back down as we enter this recession. Also, I've seen them drop this past week since we've cooled off from the FED announcement. Accessing the equity now and temporarily paying more each month is a risk you'll have to take. Use your cash out capital wisely and beat the interest rate on your primary.
Good luck
This is in Virginia. I guess the part I'm struggling to wrap my head around is several people have said the cash out refi will "look better" but haven't explained why. Variable rate on HELOC changing DTI ratio?
@Nathan Ditoto I am with @Chris Seveney on this. The Person recommending the refi is on crack (or some other mind altering substance).
I have NEVER heard that a fixed loan is better for your credit vs an adjustable rate. It IS well known that a variety of types of credit help your credit score. If you have good credit and you continue to pay your bills on time I dare say both a HELOC with a traditional mortgage will help your score.
Also the length of time you have had credit and the amount you have paid down your mortgage helps your score. A brand new mortgage that has not been paid down at all will NOT look as good as an 11 year old mortgage that has been paid down perhaps 25%.
@Nathan Ditoto You have some good responses above but what these "other" lenders are telling you really frustrates me - but you aren't the first.
First thing to be aware of here - some lenders don't even write HELOCs. And I have seen some lenders bash HELOCs because of this. Some lenders get paid LESS on HELOCs than a traditional mortgage...and I've seen similar responses because of this too. The idea that an appraisal might be different because it's a HELOC is trash - some lenders don't even need an appraisal for a HELOC. And that some lenders will see a HELOC differently? This might be true - and those lenders we don't work with. So let me just present a HELOC vs. 30 year fixed rate comparison so you can see the difference if you don't mind. I think this might be a little more fair presentation.
To me there's a couple of main points of difference between the two:
1. Lines of Credit have low costs
2. Mortgages are fixed Rates
What this means is that a Line of Credit is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. What will the rates be in 5 years? Who knows at this point - and that is the absolute definition of "risk". So if I'm keeping money on my HELOC long term, it might catch me off guard at some point. Maybe it won't....but maybe it will. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate. So keeping a balance on it might be really bad for me.
However, if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.
On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to "buy and hold" properties for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.
I've literally seen HELOCs that were free - meaning, absolute no closing costs. A 30 year mortgage will ABSOLUTELY have closing costs.
You only pay interest on a HELOC when you use it - so if it takes you 9 months to find a property, that's 9 months you didn't pay interest. If you take out a 30 year loan, you are paying interest right away - whether you have a property or not!
You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Pros and Cons to either for sure. Thanks!
Not. A. Chance. 3% vs 6% rate. I don't think so. I am all about leveraging my money but doubling the interest rate on your home is not a good idea in my humble opinion.
