HELOC or Home Equity Fixed Rate Loan

[Jerome Morelos]

I'm debating on whether to use a HELOC or a Home Equity Fixed Rate Loan to finance a garage conversion ADU. I am in the process of getting bids for the 350 sq ft garage conversion ADU, but I'm expecting 70-85k. Could rent it for $1,500. What are your thoughts on my 3 options below:

1) Use a HELOC to finance a garage conversion ADU. Use the cash flow from that + my W-2 income to save up for another value-add, owner-occupy property. As soon as there's enough equity, refinance and pay off the HELOC on the first. Issue of course is the ARM on the HELOC, but I get the flexibility and interest-only payment option.

2) Use a Home Equity Fixed Rate Loan to finance a garage conversion ADU. and repeat the process in option 1. The interest rate will be higher than the HELOC, but with the peace of mind of a fixed rate. I've gotten quotes of 7.35%, term 20 years. I also won't have the flexibility of the HELOC and will be required to pay P+I on the lump sump borrowed from the gecko.

3) Hold off on the garage conversion ADU and use a HELOC to acquire my 2nd value-add property instead. The opportunity cost would be the cash flow from the ADU. This is all in SoCal, so that cash flow would be nice.

[Jerome Morelos]

@Trevor Alexander 

Thanks for the reply. I do plan on paying off the HELOC in < 5 years using the equity for my next value-add deal. Since HELOCs are interest only during the draw period, my monthly payments would be less than the Home Equity Fixed Loan. Even if interest rates go up to 10%, it would still be around the same monthly payment as the fixed loan. Interest rates would have to go past 15% in order for it to break even, which I doubt will happen within 5 years.