HELOC vs. Cash Out Refi

[Dan Shelhamer]

HELOC or Cash out Refi? This may be a dumb question, but just wondering which one is better to use? Which one is a cheaper way to do it, or are they basically the same thing?

I currently owe $176k on my primary residence, and it is worth $225-230k.  Also, a current rental property I am looking at would have roughly $68k in equity after fixing it up if my numbers are correct.  Is their a way to pull out the equity on both of these properties in order to then have 80-90% of $117k (total equity in both).  Then be able to buy 2-3 more properties with that.  Also, want to make sure I am not over leveraging myself but my strategy is long-term hold so I'm not sure if that even matters.  Please let me know your thoughts/advice.

Thanks in advance!!

[Chris Mason]

I know it's everyone's least-liked answer, but I'm going to have to give it anyways: "It depends."

HELOC - You can open it with a large available balance, but a current balance of $0, and probably have some trivial annual maintenance fee while it's open with zero balance. Some combination of a higher interest rate or being adjustable rate will happen here, but the great thing is that you're not paying interest on the money until you need it.

Cash out refinance - You get the money now, and pay interest on it now. Lower rate and can stay fixed rate. Great thing here is you can show sellers proof of funds and be an all-cash buyer.

So you need to ask yourself how ready to make a move you are. If it's "now!" then cash out refinance might be the best route. If you're going to sit on the sidelines for months/years waiting for the perfect deal, go HELOC.

If you go the HELOC route: after you've made your move, whatever and whenever that is, you could then do another refinance to consolidate the HELOC and the old first mortgage. This has closing costs. So you need to figure out if interest saved via HELOC route + refi closing costs, is a net savings or not.

The longer you're going to be on the sidelines, the more appealing HELOC is. If you want to be fast, cash out refinance now -- and you can even show sellers that you've got $XXXk sitting in a checking account waiting to be wired.

EDIT: fun trivia. Some RE people transition into being hard money lenders by having maxed out HELOCs always open but with minimal balances. Someone's in a tough spot and needs $50k? Boom, here it is. This person will pull it from their HELOC at say 5% to lend out at say 12%. (Recorded as a private mortgage with the county, etc)