HELOC vs Cash Out Refi

[Parker Larsen]

So I'm having some analysis paralysis with looking at a Cash out refi vs a HELOC on my primary residence.

To paint a picture, living in a townhome and will rent it out when we move in 2-4 years. I want to take advantage of the equity and invest in a property. I can do a cash out refi and increase my payment nearly $500 a month or I can get a HELOC.

The HELOC is appealing because I can use it when I find a deal and I only pay back what I use. But it also seems very risky to borrow against my primary residence. On the other hand, the cash out refinance would increase my payment to a point where I would cash flow only $100-$200 when I end up renting the place and moving out.

Anyone have experience with either? Do you prefer one over the other?

[Dan Milinazzo]

I love this question. In my opinion it boils down to how fast you can deploy the funds and how much equity you have. As your primary residence if you have a little equity but don't have plans to deploy it right away a HELOC is the way to go and is very cheap to open and in most cases I have seen HELOCs on primary residences can be pretty favorable LTV (80-100%). For instance I did one at 100% LTV through a local credit union. If you have a ton of equity but you know you can put the money to work right away and earn MORE than the additional costs to your current mortgage payment then go with a Cash-out, but its more costly for the closing fees and will leave some more money locked up in equity because the refi is usually a lower LTV (like 70-75%). The alternative option, if you have a bunch of equity, is to do both. I did this on an investment property though not a primary. I was able to do a Cash out refi to the max level I was comfortable with while making sure the rents would cover the new payment and I would still cashflow what I needed to. For the balance of equity tied up in the property I utilized a HELOC to gain access to up to 80% LTV. So, while I still have some equity locked up in the property, I am tapping into as much as I can and I immediately deployed the cash out money for some debts and now I use the HELOC money for investing. Good luck!!