HELOC or cash out refinance?

[Parker Larsen]

So I'm having some analysis paralysis with looking at a Cash out refi vs a HELOC on my primary residence.

To paint a picture, living in a townhome and will rent it out when we move in 2-4 years. I want to take advantage of the equity and invest in a property. I can do a cash out refi and increase my payment nearly $500 a month or I can get a HELOC.

The HELOC is appealing because I can use it when I find a deal and I only pay back what I use. But it also seems very risky to borrow against my primary residence. On the other hand, the cash out refinance would increase my payment to a point where I would cash flow only $100-$200 when I end up renting the place and moving out.

Anyone have experience with either? Do you prefer one over the other?

[Andrew Postell]

@Parker Larsen To me there's a couple of main points of difference between the two:

1. Lines of Credit have low costs

2. Mortgages are fixed Rates

What this means is that a Line of Credit is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. Rates are low now...but what will they be in 5 years?, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

However, if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!