Cash-Out Refi, HELOC, or Wait?

Question

I am currently looking to access the equity ($50k) in my duplex. I have talked with a few banks and my options are:

1. Refinance at 4%, 20yrs fixed with a HELOC up to 80% LTV with a 4.5% rate

2. Cash-out refinance 4.5%, 30yrs fixed

3. Refinance at 3.75, 30yrs fixed but have to wait 1yr before they will let me set-up a HELOC.

Obviously I would prefer 3.75% but at this point am not really willing to wait another year before I have funds to move forward with other investments. The difference in my monthly payment for the cash-out vs 4% refinance is $27/month. At this point it seems like a cash-out refinance is a better route so I wont have to pay interest on my HELOC each time I put money into a deal? Any advice?

Aly W. · Answer

I've used HELOCs on 5 of my 7 rental properties to purchase each one. I've hit a wall though...can only find 1 portfolio lender willing to finance anything else, and the rate/terms aren't great. Fannie Mae guidelines won't allow more than 4 financed properties, although we squeaked by with 5. My husband and I invest in condos in FL, so that's part of the problem. Citibank will finance more than 4 properties, but not condos in FL.

Account Closed · Answer

Chris,

Based on your later posts, option 2 is the way to go then.  Try to minimize the associated costs with the cash-out refinance so you can refinance it a year later at a lower interest rate should rate stays the same or lower next year.

Account Closed · Answer

How about a 3/1 or 5/1 ARM with no points no costs?  This way you can refinance after 1 year and it doesn't cost you any upfront money?

In my opinion, HELOC is the way to go.  It doesn't cost any money upfront, and you only pay interest on the amount of money that you withdraw from the HELOC. Ask for an interest only HELOC. Credit union tends to have the best interest rate on HELOC.

Jon Holdman · Answer

I'm sure it varies by area.  Around here 20-25% down for 15 year fixed loans from a local portfolio lender is very possible.  Its a local bank, though, with branches along the front range (and a few out in Palm Desert, CA.)

Christopher Bush you may have to speak with dozens of banks to find one that will do these.  Another way is to check the FDIC institution directory and look for smaller banks with real estate loans on their books.  Or, if county recorders have their records online and those include the names of lenders, look through those records and see if any patterns emerge.  You're looking for properties where the owner's address is different than the property.

Jared Orme · Answer

@Christopher,
 Enjoy the research on owner financing as there are alot of resources out there. Most will cost money but be quite comprehensive in their instruction.

As to the resources it will come down to great credit score and 50% down for 10 year loans.
 It is absolutely implausible and ridiculous in my book but they have the money. From a rental hold cash flow scenario this is undo able. Hence the need for pursuing owner financing.

Christopher B. · Answer

@john holdman Almost all local banks I've talked with recently say no to financing a rental property before they even know my financial situation. The best options I have found so far is a local bank offered 5/1 ARM portfolio loans for future rentals at 4.5% amortized over 20yrs.  To me this sounds kind of risky considering what it could do to my cash-flow down the line when rates go up. So I have found financing options but am a bit unsure if it's a good option and what kind of strategy investors use with these financing terms? Maybe I haven't talked with enough banks but I can't find anyone to give me a fixed rate for a rental property.

@Aly L This is good to hear. This is technique I worked out in my head but have trouble understanding how people are getting FNMA financing as that option has been quickly shut down at every bank I have talked with. I will check into Citibank though, thanks!

Jared Orme I will have to do more research on owner financing. When you say "have enough resources" to acquire financing what do you mean? 6 months PITI, 720 credit, 20%-25% down?

Jared Orme · Answer

@Christopher and Aly,
 The lending caps are a challenge. As John Holdman stated, if you have enough resources, you can still get shorter term lending for a more, but in such a hold strategy this does not often mean you are getting enough cash flow. If you desire to progress with a hold strategy that involves dozens of properties you will need to work with owner financed properties.

These are great options as this economy has made owner financing mainstream. There is no limit on held properties and with the right deals, you can make significant cash flow.

Jon Holdman · Answer

Christopher Bush I'm not sure I understand your question:  "I don't understand how investors are getting conventional loans for multiple rental properties?"  As long as you meet the qualifications and have money for down payments, then you can get a lot of loans.  Not conventional, but portfolio lenders.  Terms are shorter - 15 years vs. 30, but loans are out there.  One friend bought four, all mortgaged, in the last year and another has bought over two dozen over the last few years.

I agree with you about ARM's, though.  Why take the risk when rates are very low right now?

Christopher B. · Answer

Minh: I am refinancing the property either way because my current rate is 5.75%. So I don't have the option to just do the HELOC. In the future I will likely just set-up a HELOC when possible due to the no upfront costs though, thanks.

Kyle: Yes, my intention is to use the cash to invest in flips to generate some working capital which will lead to more rentals down the line. I'm not a big fan of ARM because I worry about what will happen to my rental portfolio when rates start going up down the line.

I don't understand how investors are getting conventional loans for multiple rental properties?

Kyle J. · Answer

I'm assuming you're going to use the cash to buy another income producing property. That being the case, I would choose option 2 (cash out refi). That way you'll have access to your money for a long term at a low fixed rate. I personally would not do an ARM with rates being as low as they are now. With an ARM you'll likely have to do a refi at some point, and who knows where rates will be then? Why risk it?

I recently did a cash out refi myself to buy another house, and I went with a fixed rate mortgage.

Cash-Out Refi, HELOC, or Wait?

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