Refis: HELOCs vs. Cash Out?

Question

Hi all,

We're working on re-fing three small multi-families that we're holding that have higher rates and ~$300k in combined equity! In the COVID-19 financing climate locally, we're seeing higher interest rates for investment props and cash out products. We're deciding between:

1) Refi into lower rates and payments (1-1.5% lower) and then getting a HELOC on the equity. Pros: lower base interest rates, lower adjusted monthly payments, lower loan costs, HELOC applications costs are minor, not paying interest until the money is used for that next investment.

2) Cash out refi on all 3 properties - Cons: higher base % rates, higher loan costs, similar monthly payments, Pros: fistfuls of cash to parlay into the next deal

3) 1st Lien HELOC - buy out the current loans balances with a HELOC with 1st lien - Pros: Even lower loan costs ($10-$15k less!), lock in rates on the balance used to pay off the loan, and continued use of 10 years revolving line of credit. Cons: you tell me, I hate the word "lien."

Some questions:

- Are folks having problems getting access to HELOCs right now? I hear these are the first to 'dry up' during 'uncertain times.'

- Is everyone seeing higher rates for investment properties and CASH OUT refis?

- What are concerns with HELOCs if we plan to lock in rates on the $$ used, pay down principle ongoing, and treat it like a loan (with the benefit of a revolving credit line)?

- Why does Cash Out Refi come across on BP as the holy grail with little to no mention of the HELOC method?

Anna Swartz-Lopez · Answer

All things being equal, a line of credit is usually more flexible than a mortgage. However, 2020 is far from normal.

HELOCS and lines of credit are the first thing to freeze up during an economic crises. Also, I am starting to hear certain lenders calling due outstanding lines of credit. So it's not just that a lender may not give you a new HELOC, it's also the possibility that a lender will ask you to pay the outstanding balance on any line of credit. This is because the easiest way for a lender to clean up their balance sheet during an economic crises is to cut lines of credit.

Cash out refinance gets you what you are looking for in a single step, which, in the current lending environment, may be simpler. I really suggest having this conversation with your lender, to see how they are reacting to this particular set of circumstances.

Paul Shannon · Answer

I had a very similar debate over this about a month ago. I think the HELOC or a business line of credit is the way to go. It keeps your risk lower on the properties you already own. You only will pay interest if you use it and the costs to open the line are low. I love to have the option to access cheap money whenever I want it to jump on opportunities.

It is difficult to find them right now though. May have to source through local banks or credit unions. I believe all the big banks have shut off new applications.

Refis: HELOCs vs. Cash Out?

2 Replies