Cash Out Refinance - Need Advice

[Joe Coyne]

Hello all at BP,

I have a duplex that I am currently living in half.  I purchased three years ago at $130k and, at the time, I thought a 15 year was the answer - lower total cost at an unheard of 2.75 rate is what resonated with me.  Not the worst mistake I could have made.  Fast forward three years and close to $70k in improvements and now we're looking at a market value (to be conservative) of $225k and equity of more than $140k. All good right? 

My goal is to buy a new home within the next 12-15 months (to live in) and then convert this to a full on rental property.  I thought this would be a perfect scenario for a cash-out refinance.  I can roll the existing note + $80k cash into one and still be at 75% LTV - perfect, right?  At the same time, I reduce my initial investment on this property to close to nothing - thus making each dollar of cash flow higher yielding.

Every lender I've talked to at this point says I'm crazy to give up that low rate and that I should just do a HELOC. For my purpose that makes no sense right?

What I'm seeing now is that I can get a 30 year fixed at ~4.4% but close to $5k in closing costs. These 5/1 ARM's are going for 3.9% and next to nothing closing costs - part of me thinks that's a good idea (especially if i were to flip within 5 years) but part of me likes the certainty of a fixed rate.

What would you do?