HELOC or Cash Out Refi?

Question

Hello, everyone.

I'm a newbie looking forward to getting started and getting my first BRRRR deal. My biggest struggle right now is understanding whether to get a HELOC on my primary home or do a cash out refinance so I can get started. Can you all give me your thoughts, pros and cons?

I owe around 168k on my primary but the last appraisal about 1 year ago came in at 422k. There's a lot of equity here I can tap into, but I just need help with the options.

Thanks for the help!

Chris

Jay Hurst · Answer

@Christopher Sarter-Soto    When you are looking to leverage any property (but especially your primary home) with a variable rate product you need to understand what your payoff plan is. In this case I assume it would be the refi portion of your planned BRRRR.

In that case you need to understand your refi options on the BRRRR before you purchase. You need to understand loan to value  and seasoning requirements before you buy based on your ARV. Too many people do not think ahead and borrow 100k but can only pull out a much smaller number to pay back or have to wait longer then they expect.  If/when that happens you have to account for the additional interest that the HELOC is costing you a month, and all of sudden the deal you think is so good suddenly is not as profitable as you modeled.

Christopher Sarter-Soto · Answer

Thank you all for your input! It sounds like at the current moment a HELOC would be the way to go as it can help keep costs low by only paying interest on what I pull out rather than doing a refi and being locked in to a higher payment regardless whether or not I find a deal.

@Nicholas L.

I plan to use the HELOC for acquisition only and my own cash for the rehab part of it. I assumed it would be a little risky to do 100% using a HELOC since there's a chance I won't get to pull 100% of my investment back out after the refi part of BRRRR.

Nicholas L. · Answer

@Christopher Sarter-Soto

it sounds like you're planning to borrow 100% of the cost - is that accurate?

just to be blunt, that is expensive and high risk.  do you have any cash?

Joey Banasihan · Answer

Hey @Christopher Sarter-Soto!

Great question, and it’s awesome that you’re thinking strategically about leveraging your equity for your first BRRRR!

Both a HELOC and a cash-out refinance have pros and cons depending on your long-term goals:

• HELOC gives you flexibility—you can pull funds as needed, and you only pay interest on what you use. Rates are typically variable, so keep that in mind if you plan to hold for a while.
• Cash-out refi locks in a fixed rate but resets your mortgage balance, meaning a higher monthly payment. If rates drop in the future, you could refi again, but right now, it’s a higher upfront cost.

Each option carries risk, so it depends on how soon you plan to reinvest and how you want to manage your debt. I’ll DM you—happy to chat more, we talk through this stuff with our clients all the time.

Chris Barrett · Answer

There's 1 important factor you need to take into account, how long will you be holding onto the heloc? Helocs aren't favorable for long term financing, so more than a year, as you'll end up paying a lot more in interest. If you are able to do your purchase, reno, and then refinance to pay off the HELOC then you're all good. Make sure you understand your seasoning requirements for the bank you want to refinance with.

Pat Lulewicz · Answer

If the rate of the cash out refi would be higher than your current mortgage, then just do the HELOC. There's actually a good chance your overall "cash out" with the HELOC will be higher (most banks will go up to 90% vs 80% is generally the highest a cash-out will do) albeit at a higher interest rate, but you can protect the original mortgage rate if its very low (2020/2021 rates).

Also consider the flexibility of only pulling on the HELOC when you need it thereby keeping expenses down. If you do a cash out and can't find a deal right away, you're blowing through the interest on that amount that you cashed out.

Sofia Komrskova · Answer

Do a HELOC. That way you don't increase your payment unless you pull money out. Cash out means a higher interest rate and a higher payment in today's economy (I'm assuming you bought when rates were lower).

HELOC or Cash Out Refi?

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