Cash out Refi vs. HELOC

[Mike Gorius]

I'm in the process of getting a HELOC with lower.com, and the rep gave me an interesting option that I am trying to poke holes in (devil's advocate), but I am having trouble doing so. What are everyone else's thoughts?

Option 1: HELOC with lower for 50K. Ten-year term, interest only prime +1 monthly payment. Of course, whatever I have pulled out needs to be paid back in full at the end of the 10-year term. We initially thought this process would take 30 days, now saying 120 days for several reasons, and most banks are in a similar situation. My current mortgage lender said it would take more than 30 but less than 120, and yes, there is a delay.

Option 2: He told me about this earlier today. Due to living in Phoenix, my house has increased significantly, and we made some updates, and I could do a cash-out refi. Currently, my mortgage shows the home is worth 320K with a 3.25% rate paying $1,450 PITI. Last week my house was appraised for 435K. He said they could do an 80% cash-out refi at 6.1% and drop my PITI to $1,330 while giving me the 20% to invest. This was my goal with the HELOC.

This seems too good to be true. Any thoughts? I'm not sure how he is getting $1,330 PITI because when I run the numbers, the payment should be $2,100. I plan to ask him this next time we talk.

I like this because my monthly payment would decrease (if the math checks out), and I plan to turn this home into a rental in the next 1-2 years anywhere. This is not my forever home; it's business. I would also have more money to invest.

I don't like this because it seems too good to be true; my rate increases, and I just refinanced in September 2021 to get to 3.25%. This is after buying the home in November 2020. 2 refinances in 2 years seems like a lot, lol.

Thanks y'all,

[Andrew Garcia]

Hi @Mike Gorius, that is some really funny math.

Assuming a 30-year term, the principal + interest portion of the cash-out refinance would be well over $1,330. Maybe we are both missing something.

The only way I could think of that is interest only or negative amortization or something like that.

I would offer an alternative solution. Get a HELOAN. Assuming you did an 80% LTV loan in September, you would have approximately $250k left on your mortgage.

Doing it at 80% gives you $98k back and your blended rate is now 4.87%. Basically 1.25% lower than the cash-out refinance.

I think this option would be better for your scenario because HELOCs are generally best for deploying as short-term capital.

HELOANs act as a 30-year, fixed-rate, fully amortizing the second lien so they are perfect for deploying into a long-term asset like real estate.

If you plan to use the funds for a rehab or a flip where you will pay back the HELOC in 6 months, I would recommend that option.

Hope this helps! Let me know if I can be of any assistance.