Appraisal high. Cash out or HELOC?

Question

My first property just appraised way higher than I expected. Was in process of doing Cash Out Refi but now am hesitant since if I want to take out all available cash, my mortgage will most likely be making me lose money each month.

I am now considering if a HELOC is a better route as I may be able to buy properties outright now and this would keep me making ultimate cashflow on my existing property.

Property appraised for $310K after purchase in early 2018 for $163K. I should be able to HELOC enough for a property + rehab in mid west.

Any insight appreciated. Merry Christmas!

Marcello Di Gerlando · Answer

@Tim Kaminski

I second @Paul Defngin

If you have a property already lined up to buy then the cash out may be best. I would recommend the HELOC if you dont already have a property. HELOCs at easier and cheaper to acquire and you are not paying for it if you are not using it. I prefer HELOCs personally because I'm not doing back to back deals. I keep the line open and I'm always ready to pounce when an opportunity presents itself. Keep in mind HELOCs are temporary and you need an exit to clear the line quickly.

Good luck

David H. · Answer

@Marcello Di Gerlando

Hi Marcelo, one option I have come across at KeyBank, which I believe other institutions offer, is a HELOC with the option to term out balances into a fixed 15 year term loan as you go along (I believe up to 3 times). It’s not ideal but it’s a sort of work around.

Right now my HELOC is at 4.5% variable, I’m going to use it for rehabbing a duplex, est. cost $30k. I am considering locking in a fixed rate and terming it out. I may not though since I don’t foresee rates jumping anytime soon. It’s nice to know it’s an option whenever tho if rates do start to creep up.

Paul Defngin · Answer

@Tim Kaminski depends on your objective and when you plan to put the money in play. If you are looking to use the money now, I recommend the cash out since rates are still relatively low.  If the objective is have readily easy access to your equity for when an opportunity presents itself then I recommend the HELOC route since you will pay what you draw on at that time.

Nevertheless the above are just recommendation but only you will know what is best for your particular situation.  BTW you didn’t not how much you still owe above or whether this is your primary home or investment property...or maybe I missed it 😀

Happy Holidays.Cheers,

Paul

Tim Kaminski · Answer

@Paul Defngin thanks will discuss it further with my realtor.

It is an investment property that I currently owe $150k on.

Marcello Di Gerlando · Answer

@Tim kaminski

Yes, for the refinance or what ever creative finance method you may have available. HELOCs haven't always been variable Igave a fixed line still open. Shop around you may find one. I've been shopping for a new fixed HELOC myself but no luck just yet.

Zachary Beach · Answer

@Tim Kaminski

It depends on the specific terms but normally a bank can freeze meaning not let you borrow any more even if they had agreed to more before.

There are a few reasons I can think of

1 bank reaching there loan max. There are rules on how much banks can loan and if they reach it and have lines of credit open they could cancel it.

2 The bank no longer thinks you are credit worthy

3 the market drops

Basically if the bank decided to they can.  It’s not super common in good markets but it’s something to be aware of.

Tim Kaminski · Answer

@Marcello Di Gerlando Yes I like that you don’t pay closing costs with HELOCS. Don’t like that the rates are variable.

When you say clear exit, you are talking about a refinance on the future deal to pay off your HELOC, for a buy and hold investor?

Tim Kaminski · Answer

@Zachary Beach Why would a bank close a HELOC? Would that only happen if the market goes down so value of the house goes down as well?

Zachary Beach · Answer

@Tim Kaminski

Keep in mind that if you have a heloc the bank can close it and not lend to you so make sure you know the rules on that and are protected. I would personally take the money.

If you are worried about over leveraging you can take the money and put aside say 10-20% and leave it in cash/ a 2% bank account with fdic guarantee and be able to us at any time. That would give you the proper contingency fund and the protected to be move aggressive on other deals. (Good brrr’s not bad deals)

If you are paying 4% for the money and take 50k and then put 10k in bank account and use 40k to get property the return the total return will be as strong as 5% on less only borrowing 40k but they bank can’t close the refi but they can close the line of credit.

I just had an investor that was going to lend me 100k from a heloc they had but the bank closed there line.  I was able to figure it out and purchase the house I was in contract with but it has made me not consider heloc to be as good as a set refi plus it’s normally more expensive.

It could also be a good option depending on financing, points, interest, and interest only payments to get the heloc and just take it all at once. It can’t be closed if the money is out.

Lots of real estate people had heloc for reserves and lost it all because the heloc closed when the market crashed.

Tim Kaminski · Answer

@CJ M. True. But would only be taking enough for a small DP instead of enough to buy a property outright with cash. Would like access to more funds so I can properly BRRR

Appraisal high. Cash out or HELOC?

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