HELOC or refinance for live in flip

[Richard Poarch]

Hello, this is my first post on bigger pockets. I have read many articles in the form and I have also read books BRRR, the flipping framework and the book on flipping houses, in addition to listening to the podcast for the past a few months. Experience wise I did work with my father flipping 4 houses as a teen through 2006-2008. Just trying to educate myself on how to best utilize my situation. So I was lucky enough to purchase a house in Thornton Colorado in 2015. My house is valued at approximately 400,000 and I owe 200,000 currently. I have a small three bedroom one bath on a third of an acre, one of the bigger lots in my area. A two car garage and a large driveway could easily fit six trucks plus a lot of off street parking. We live in a great school district That is very attractive for families. I also have no HOA. After considering my options, I have decided to go with a value add fix and flip. I know I can get 250,000 profit tax-free and so that would be my target. houses similar to mine are currently selling between 400 and 450,000 and if I add one room and one bath turning my house into a four bed two bath, which is extremely rare in my neighborhood I see comparable selling for 500- 600k. To do the value add fix and flip I would need to access my equity and this is where I'm having a hard time deciding what would be my better option doing a HELOC or a refinance. From my perspective, I have a timeline of six months that I would like to accomplish this so the turnaround it's pretty short making a HELOC acceptable. Are there any considerations or red flags that I might not be noticing? Are there any benefits to doing a refinance that I am unaware of that would make it a better option than the HELOC for my situation?

[Patrick Roberts]

Heloc all the way for this if you have a low rate first lien. Since you will be using the funds for construction, you will most likely be paying in draws as the work is completed, so you can draw on the line in similar fashion. Even if the note rate is higher than a refi, you'll likely still come out miles ahead. 

For instance, if your rate on your $200k balance is currently 4%, and you plan to draw $100k total for the construction on a heloc at 9%, you will not draw all $100k up front. You would pay draws as the work is completed, so for the first few months, the drawn balance on the heloc would be low or nothing, meaning little interest accrues at 9%. If you refi, all of the balance is reset to market rates (probably 6.5% to 7% right now) and interest accrues on the full balance each month from day 1.

The risk I would want to point out with using a Heloc is that there is the potential for the line to be frozen or converted. Most Heloc's have clauses in the loan agreement regarding financial conditions, undue/unauthorized risk, change in circumstances, etc. Long story short, in most cases the lender can convert your line on a whim if they really want to, meaning you would lose access to the undrawn funds. If the certainty of liquidity and access to the funds s important to you and you dont have any backup plan, you'll want to consider this in your risk/reward analysis.