Heloc vs. Cash out refinance

[Alexandro Paredes]

Hey guys I have an FHA mortgage currently looking to purchase an investment property. What advice can you give me on funding through a cash out refinance versus a heloc. What are rates and costs associated with each.

[Chris Mason]

HELOC is for short term money, cash out refi for long term.

HELOCs have lower closing costs, higher variable interest rate, and interest only accrues when you actually draw funds.

Cash out refinances will typically have higher closing costs, a lower fixed rate will be available, and interest starts accruing right away (even if it takes you 10 months to find your next property).

A common pattern if you may find a deal in a month, or 10 months, not really sure, is to

1) Get any refinancing out of the way, you have an FHA loan so you should certainly drop that off.

2) Get the HELOC, leave the balance at $0 so you aren't paying interest.

3) Buy the rental.

4) Come back to the property with the HELOC and see if it makes sense to cash out refi and consolidate the 1st and 2nd into 1 30YF.

If you're determined to score that deal within the next 90ish days, skipping right to a cash out refinance is probably best. At that point it's just 2-3 months of interest, but 2 fewer transactions, which is a good tradeoff.