HELOC vs. Cash Out Refinance

[Chris Reichenbach]

I am getting ready to do some updating to my home before I furnish and make it a medium term rental. I plan on using credit lines to fund all of the rehab but am curious about my options to pay them off through a cash out refinance or a HELOC?

The cash out refinance seems pretty straight forward by getting an appraisal after the rehab is complete and getting 80% of my cash out. However, a few different lenders have been trying to push me towards a HELOC but a HELOC on my current equity would not cover all of my rehab expenses.

Would it be possible to fund the rehab through my credit line like I planned and pay it off with a HELOC based on the new appraisal after the rehab is complete? Or would sticking with a straight cash out refinance be more beneficial to paying off the credit line?

[Scott E.]

@Chris Davidson nailed it. The biggest consideration here is the rate on your 1st mortgage. If you currently have a 3% rate on a 30 year fixed loan for your 1st mortgage, then you should not do a cash out refinance. You'll lose that rate and your total monthly payment on this deal will skyrocket from what it is today.

A HELOC comes with a variable rate that is generally tied to the Wall Street Journal prime rate. This means your HELOC rate will be high today. But at least you're only paying that high interest on the amount of the rehab vs the rehab plus 1st mortgage.

Also check with your CPA, but interest on a HELOC when used to renovate the subject property *should be* tax deductible.