Refi portion of the BRRRR

[Tracy Graham]

Need feedback please. After the rehab is done on a property and the tenant moves in, I have gone back to my loan officer and refi using a HELOC. Is this the best method or just do a simple cash out refi ??? I don't think I hear a lot about the specifics between the 2 during an active BRRRR process. Which is better/most profitable ??? Doing a HELOC (on that property) as the refi portion or a cash out refi ? Thank you for any advice !

[Andrew Postell]

@Tracy Graham so there are some VERY distinct differences between these two products.  Now, some of the math here might be dependent on how you PURCHASED the property (with cash or with a loan) but just for concept purposes here's what I would say the differences are:

1. Lines of Credit have low costs but the rate adjusts

2. Mortgages are fixed Rates but have higher costs

What this means is that a Line of Credit is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. Rates are higher now...but what will they be in 5 years?, Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

What HELOCs are designed for is to be a giant credit card.  And just like any credit card, you need a plan to pay it back.  So if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. 

Hope all of that makes sense.