Suggestions for HELOC

[Tim Nethers]

My wife and I purchased our home in Florida for $430k last year, we put $120k into renovating the entire house. I'd like to get a HELOC that would allow me to pull out cash when a great deal comes up. Couple of questions, is it best to find a local lender or is there a preferred lender nationwide? Any feedback on the various HELOC programs? My goal is to buy and hold additional cash flow out of state multifamily.

[Jason Wray]

Tim,

I would consider doing a cash out refinance. I know your goal might be get a HELOC keep it until you need something without having a monthly payment. The down side is now you have (2) liens against your home and cannot take out a 3rd if you need money down the road. You also now have additional tradelines which in some cases can hurt your DTI and scores. You also have to remember that if for any reason your credit scores drop or you take on more debts credit cards car loans the HELOC lender can and will reduce or freeze your HELOC limit.

HELOC's are also not an asset and cannot be used as reserves when buying new home down the road they are an excessive trade line liability. Cash out refinance is "Cash in the Bank" no hold no delay to pull out. It also can be used as an asset and PITI reserves for future REI purchases. It also allows you to have (1) mortgage (1) payment and no second lien. If in the future you need more cash or a small loan you can now go back and take out more cash since there is No 2nd lien position.

Lastly HELOC rates are usually a high or higher than a refinance due to the FED raising rates. Helocs can also carry a prepayment penalty and are set up on an I/O interest only which offers zero payback on the loan. Most Helocs are on a 10, 15 or 20 year so the amortization does not offer a lower payment versus a 30 year fixed. If you only need $20-$30K it might make sense for small projects but when your talking $80-$100K or more a 30 year refinance offers the lower payment.

Plus in most cases 85% of the people who take out a HELOC consolidate it within 3-5 years so down the road it becomes a refinance and costs extra.