HELOC vs. Cash-out Refi...

[Reid Sealby]

Hello friends! 

Last August, I purchased a home in Arvada for ~530k with $0 down using the VA loan. Since then, a recent market value analysis shows us that our house is likely worth $650k-$700k in the current market. I want to take advantage of the massive increase in equity in our home in this short time to purchase another property. From the research I've done I've narrowed down the two most viable options to HELOC or Cash-Out Refi. I'm hoping a few seasoned investors could weigh in on...

Pros/Cons to HELOC. Does taking out a HELOC affect your DTI ratio/credit score drastically? Are all HELOCs variable interest rates? Any recommendations for banks/credit unions in the greater Denver Area that make the HELOC experience seamless?

Pros/Cons to Cash-Out Refi. What kind of sneaky fees are associated with a refinance? What kind of taxes, if any, are incurred? I've had friends explain this strategy as basically "starting over" paying off your mortgage... Since we've only been making mortgage payments for 7 months, this doesn't seem like a huge barrier for me. 

Thanks in Advance for all of your insight, BP Denver friends! Open to other ideas too, HELOC and Cash-Out Refi are just the two I've researched most thusfar.

[Caroline Gerardo]

"Market analysis" hopefully you do not mean looked at Zillow. Here are problems with refinance: rates are higher, VA will want to prove there is a net benefit to you, costs are tacked on to the loan: title/escrow/attorney/appraisal/ underwriting/notary/recording/taxes/ etc probably somewhere between $2000 - $5000 depending on where you go and loan amount. The appraiser will only use sales which closed with a loan not cash ones, sold in past 3 months with similar size and nearby... not what Zill says. Call a Realtor and get the real comps you need three. If you have three comps price some lenders and don't let them pull your credit. Assume rate is going to be 1% or more higher than in August

HELOC's work like this generally: low start rate of like 3 then prime plus something like 2 or 3 maximum 18% costs should be about $600 to set up. Some lenders allow you to lock a fixed term around 5- 7. No cost up front (no appraisal cost generally but many use AVM or digital information for appraisal which will work if you are in a tract of similar sales closing in past three months. Rural/unusual/larger than neighborhood/additions/acreage/view/any property items that make you different your appraisal will be low and ... gotcha.

Both these loans your income must fully qualify so if your debt to income ratio was 41 when you closed in August you need to have a raise. A conventional loan or HELOC will let you go to 43-45 depending on your FICO score.

If you tell me where your house is I can suggest where to apply for the HELOC first as the process costs nothing and is your first step (call me I will give you name and phone number). Keep in mind the rates for a refinance are going to flex up in the coming weeks, we pray they fall back, but no guarantees...