Refinance Rental Property -- HELOC vs Cash-Out Refi

[Evan Cochran]

Hello!  

I bought a two-family house in Somerville, MA a couple years ago that has appreciated a good amount.  I currently owe $285,000 on the mortgage at a 3.35% interest rate for another 25 years, and believe it will appraise around $650,000.

I would like to buy another rental property sometime in the near future, and was hoping to pull some equity out of this house.  Unfortunately I moved out of the house last year and no longer would qualify as an owner-occupant.  I called around a couple banks to ask about options for pulling money out of an investment property, and the it seems like the best options are:

HELOC taking out $170,000 @ 5.5% interest. Would be able to keep my existing mortgage but think my monthly HELOC payment would be around $1,043/mo. My existing mortgage principal and interest payment on that property would be $1,359/mo bringing my total PI expenditure to $2,402/mo.

Cash-Out Refi taking out $170,000 @ 4.25% interest.  Would now be paying $2,238/mo plus closing costs on $455,000 of debt.  

The house currently rents for $3,400/mo.  

Does anyone have any insights into which option would be better? I liked the idea of having a fixed rate, and am afraid of having a HELOC that the bank could call back at anytime. But I also would love to keep my existing mortgage and am loathe to refinance out of such a great rate (3.354%).

Any help would be hugely appreciated.  Thanks!

[Patrick Liska]

Evan,

there is nothing wrong with doing that,  Assuming you would need the full $170,000 as a down payment, then refinance so that you have two cash flowing properties. If you don't need the full 170, then take out what you need for the down payment.