HELOC or Re-Finance, which is better?

Question

I am interested in adding an addition onto my personal residence and am trying to determine what is the smarter financial decision for our situation.

Our house currently has a good amount of equity to help fund the project. We need about $100K to complete the job. We have the cash but also flip houses and are interested in buying notes so cash is key for us.

Do we put the cash into the house and then get a HELOC or Re-Fi afterwards to use the cash to invest? Or do we get a HELOC or Re-Fi now and use that money towards the addition? What factors am I not considering? Are there advantages/ disadvantages on a HELOC or a Re-Finance?

Home purchase price: $308,000 (Current Market Value: $350,000)

Mortgage Balance: $237,000

Addition: $100,000

ARV: $475,000

Thanks in advanced for any insight for us to consider.

Brian C. · Answer

@Andria Kobylinski If you get the HELOC to pay for it now, you'll be paying interest on that money until you can manage to pay it off.  Because you're trying to keep cash on hand, I'm guessing this may take a little while.

If you're confident in your numbers, I would use the cash to upgrade the property, then get a HELOC. You end up with limited cash on hand, but have the HELOC, which is usually just as good as cash.  Now, you're only paying interest on it when it's working for you during a flip, can pay it off fairly quickly and have a big credit line at a low rate to be used over and over.

Using your numbers: 100K cash into house results in 475k ARV.  HELOC lends on 75% LTV, meaning up to 356k.  356k minus 237K mortgage means a HELOC amount of 119k.  a 80% LTV puts you at a 143K HELOC.

I like HELOC's.  I financed the rehab for a flip and a BRRRR on my last two properties with one. The balance is currently at 0 again waiting to be utilized on my next project.

CJ M. · Answer

@Andria Kobylinski

Re: refi, it depends on the lender. For example I have one who does portfolio lending and they pulled my credit initially but that was it. They're a smaller community bank so they don't even report subsequent loans to the credit bureaus.

Honestly, after you do enough deals, you kind of stop paying attention to your credit lol

Costin I. · Answer

@Andria Kobylinski if you put the money into your house, it will just decay there. Use the money/cash/equity to get more rentals and use the cashflow from that to cover the interest for the money used for your addition, or to pay it outright (if you can tolerate some delayed gratification).

Regardless, get a HELOC, it's better than a refi-loan. You pay interest only on the balance, when you have a balance. And you can pay it off, reuse it, repeat. A loan is one time use.

CJ M. · Answer

@Andria Kobylinski

The bank will do a hard credit inquiry when approving you for a HELOC. Not a big deal at all...unless you have crappy credit.

Andria Kobylinski · Answer

@Brian C. super helpful. You really wrapped my head around that well. Thanks!

Andria Kobylinski · Answer

@CJ M. Right, make sense. Just out of curiosity....Do they not check credit on a re-fi?

@Costin I. Thank you for this feed back, that reinforces the strategy I am leaning toward.

So I'm thinking, use HELOC for renovation and the cash I have at hand to continue doing flips...flip profits used to purchase notes....note cashflow to pay down HELOC (which will eventually just be cashflow). Once I pay the HELOC down I can use it to buy more notes, correct?

Andria Kobylinski · Answer

Thanks @Doug Shapiro! When you say the HELOC will impact my credit score, if I am paying shouldn't it impact my score in a positive way? I really do not know much about what impacts scores and how much.

Doug Shapiro · Answer

Hi @Andria Kobylinski,

I personally prefer the HELOC option because you get to keep your cash (and get more with the HELOC!). I'm not a huge fan of re-financing primary residences because there is the refinance cost and the not-so-obvious long-term refinance cost. By not-so-obvious I mean you will probably extend the life of your loan, and you pay more interest earlier in the amortization schedule.

I believe getting a HELOC will impact your credit score, so keep that in mind if you're thinking of getting a loan in the future.  The HELOC is also nice because you can keep that line of credit open for other things in the future.

HELOC or Re-Finance, which is better?

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