Cash Out Refi's are now cheaper than HELOCs

[Erik Browning]

HELOCs are no longer a favored option for this market.

Before I give an example, it's a good idea to explain how HELOCs are calculated - because there are a lot of people on BP that do not know.

HELOCs are adjustable, which means that they are tied to an index that fluctuates throughout the entire term of the draw repayment. A rate on a HELOC is the "Current Prime Rate" which is a function "Federal Funds Rate." With the most current FED Announcement, the prime rate jumped from 6.25% to 7.00%, after the Fed Funds Rate jumped from 3.25% to 4.00%.

Rates on HELOCs are tied to the Current Prime Rate, which in turn is indexed to the Federal Funds Rate. The Federal Reserve sets the Federal Funds Rate. When the FED raises the Federal Funds Rate, the Prime rate goes up, and HELOC rates follow. When the FED cuts the Federal Funds Rate, the Prime rate goes down and so do HELOC rates.

Lastly, lenders add additional premiums on top of these rates based on your financial profile and needs. For example, they may charge an additional 1.00% if you have poor credit and an additional 0.5% if you are taking a draw of $25,000 or less.

Let's do an example:

A buyer/investor looking for $500,000 cash out on a free and cleared home.

The Prime Rate for a HELOC lender of mine is at 1.99% after all additional premiums + for a total of 8.99% and IO payment of $3,745.

A Cash-Out Refinance would be 6.875-7.25% for fully amortized payment up to $3,411 per month. 

$3,745 vs $3,411

This weeks Fed hike put HELOCs out of favor. And you can also refinance again if you'd like an the refinance vs the HELOC.