HELOC versus Cash Out Refinance

[DeNay Ramsey]

Hello BP Team,

I currently own an investment property in Oakland, California that I just remodeled. It was initially tenant occupied until November 2017 when they suddenly moved. In the process they severely damaged the unit to the point that I had to file an insurance claim for vandalism. It was not even livable. I used all of the insurance claim money to rehab the property and some. It will be rent ready next week. Anyway the value has gone up tremendously. I have about $220K to $250K in equity available. I am debating if I should apply for a Home Equity Line of Credit (HELOC) or a traditional cash out refinance. My credit union will fund either loan. I owe about $300K and the property is worth about $525K to $550K. With the HELOC I can borrow up to 80% of the appraised value at 5.5% with a variable APR. The HELOC is 12 year loan maximum term. On the other hand, the cash out refinance would be 4.25% amortized for 30 years with a balloon payment after 10 years so I would have to pay off the remaining loan balance or refinance again. My credit union will offer a lender credit of 1.5% towards closing cost to do a cash out refinance. In the end both loans could essentially be done without any lender cost with the 1.5% lender credit for the cash out refinance. I can only borrow 75% of the appraised value with the cash out refinance. Which would be the better option?