HELOC or Cash-out refi?

Question

I understand the difference between the two, just curious if there's a reason to choose one over another. Current mortgage is for $60k at around 3.5%. House was valued at $100k when I bought it a year ago. After $50k of renovations, I'd like to roll up some of the debt I took on from renovations and take out additional for my next investment. I've done a little market research and think it will value between $200-250k (its hard to find comparables for a 4-plex so I'm struggling to get a closer dollar amount...not sure how much comparable number of units plays in?). Anyway, since the house was worth less when I took out the original mortgage does that impact the amount I'd be able to pull or do they reappraise either way so doesn't really matter?

Thomas S. · Answer

The major advantage of a HELOC is you only take out what you need when you need it and you only have to pay interest if you choose. A HELOC is a on demand revolving bank account with 100% flexibility on the available limit.

Ashly B. · Answer

Good point. I have about $30k i want to immediately roll in from renovations but I may not buy my next place for 4-6 months... Probably makes more sense to do a HELOC in that scenario otherwise I'm going to be paying interest on the cash I'm sitting on, and honestly won't know how much I need until it gets closer.

Ashly B. · Answer

I need to know where you all are financing. I'm hitting nothing but walls. Every bank and CU I've talked to says no HELOC on an investment property and 70% LTV... which would have been fine but my appraisal came back WAY lower than anticipated so I'm basically looking at $30k cash out which is just enough to cover the renovation costs I wanted to roll in, nothing left over to roll into a new property. The comps are a joke - I have 4 1 bedroom, nicely done units near downtown that are renting for $800-900/mo and the comps are 1-3 bedroom low income housing that rent for $500-750 a piece with units that are smaller with 2-3 bedrooms than my one bedroom. I can make it work but the numbers aren't favorable - interest rate on the mortgage will go up 1%, closing costs are $4k and I'm getting less cash than planned. Just curious if there are any national banks worth looking into or alternatively, has anyone ever disputed an appraisal?

Jim Adrian · Answer

@Ashly B.

On a heloc your LTV is 75% or less pending the bank when it is on an investment property. Wells Fargo wanted LTV 65% and First National was 75%. On a primary residences you can a higher LTR percentage. I just closed one a heloc 2 weeks ago.

Aaron Howell · Answer

oh.... I thought the $200-$250K was on the next property you were buying.

In this case a Heloc or cash out would both benefit you. The closing costs on the refi would be a minus but you'd never have to pay interest that you would with the HELOC.

Ashly B. · Answer

I'm confused. The property was worth $100k when I bought it but I just gutted and renovated the whole building. It will be 80% of the new value, correct? Which should be somewhere around $225k, which will give me more like $120k unless I'm misunderstanding the process

Aaron Howell · Answer

They'll definitely do an appraisal for either option. You may avoid a lot of closing costs with a HELOC but I'd say with either option you'll only get about 80% LTV (so about $20K either option).

HELOC or Cash-out refi?

HELOC or Cash-out refi?

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