HELOCs: 5 Year length at lower rate vs. 10 years at a higher rate

[Lexie De Stefano]

Hello!

I'm looking at taking out a HELOC on my primary residence (house #1), to purchase house #2 (BRRRR method in a high appreciation/low cashflow area) that I plan to use as my future primary residence. I've been debating about the pros/cons on the different HELOC term lengths because the HELOC on house #1 would probably serve as my main financing mechanism for future properties, and I'd heard that it's more difficult to do HELOCs on an investment property. (Please correct me if I'm wrong!)

There are a few different credit unions I'm looking at that have similar financing structures, so I'm interested in hearing about your recommendations on if it's worth taking out a shorter term HELOC (5ish years) at a lower interest rate, or a longer term HELOC (10ish years) at a slightly higher one. It seems that the credit unions would pay for closing costs, as I don't intend to close out the HELOC upon repayment. Welcome your thoughts on if it's worth the higher interest rate for a longer term loan or if it's better to do the shorter one at a better rate, keeping in mind that house #1 would no longer be my primary residence.

Thanks in advance for your help! :)

[Johnny D.]

@Lexie De Stefano

This would depend greatly on your plan of action. First, I am assuming neither of the HELOCs that you are describing are fixed rates but are both variable rates (one with a 5 year draw period at a lower interest rate than the one with a 10 year draw period at a higher rate) since it is rare to ever find a HELOC with a fixed rate other than only for a short initial teaser period if offered, but those normally only last for 6 or 12 months.

My recommendation, and the strategy most people who use the strategy you are describing for BRRRRs, is to use the HELOC funds to buy and rehab the new property and after getting a renter in place, then do a cash out refinance on the new investment property to pay off the HELOC debt before repeating the process on a new BRRRR property. If you utilize this strategy, the length of the HELOC's draw period should normally not matter (except as described in my next paragraph) as you will be paying it off after each cash out refinance (assuming you are able to get all of your money back out of the deal!) which would make the lower interest rate for the shorter draw period normally the better option. In my mind, the longer draw period at a higher rate would normally only be a better option in the case in which you are planning to slowly pay off the HELOC on your own and want to avoid paying more than interest only for as long as possible.

The one thing you mentioned that would change my recommended action is that you mentioned to keep in mind that house #1 would no longer be my primary residence. If that is the case, you would want to talk to the HELOC lenders to see if you can still draw against it if this happens, as I know my HELOC lender on my primary residence required me to give permission to my home insurance agency to notify them if there were any changes to the policy in the future such as switching from a regular homeowners policy to a landlord policy as they would no longer let me draw against it in the future should it no longer be my primary residence. Depending on their response, this could greatly hinder your plan. If you are able to continue to draw against the HELOC in this situation, then the longer draw period at the higher rate would likely be the better option since you'd still be able to draw against it for an extra 5 years.