HELOC on Rental Property

[Jake Williams]

My wife and I are nearing completion on the renovation of our primary residence in Eden Prairie Minnesota. We planned to get our home reappraised and take out a HELOC against the equity (~$100k). I am having conversations with lenders about HELOC rates and I am hearing that they require us to sign an Occupancy Statement that agrees that the home is and will continue to be our primary residence. I can't in good faith sign something like this with my intention being otherwise. We could pivot and go for purchasing a rental property next instead of making our current home a rental, but that would change our trajectory and probably take some convincing on my wife's end.

Is this a one off for this bank or is that common for the HELOC loan product? We may need to look more seriously at a cash out refinance in our situation. How do closing costs compare between a HELOC loan and a cash out refinance? We refinanced in April of 2020 when rates were dropping like crazy and our plan was for a HELOC, so another refinance would be costly from a closing cost standpoint.

Thanks for any advice!

[Andrew Postell]

@Jake Williams we would, of course, always encourage you to be honest with things you say and sign with a lender. This is normal for a HELOC to have that type of a wording since HELOCs are for primary homes. A "Line of Credit" is more for rental properties.....I know, they sound similar but they are different to banks. Closing costs on a HELOC to a cash out loan are NIGHT AND DAY different. Usually HELOCs are like $500? Sometimes not even that. And then a cash out refinance will be thousands.

Now, just something to consider, a cash out refinance will also have a requirement to live in the property for 12 months. So if you can commit to that then you would get a "non-owner refinance"...essentially an investment property refinance which will have different LTV requirements and different rates. So the same type of thing above with the HELOC/LOC choices.

It may not be what you want to hear but it's the right information to know about.  Feel free to ask anything additional if you need to. Thanks!