My parents are looking to downsize to another house. Their current house is paid off and in a prime location to attract renters so they’re not looking to sell. Should they be looking into a HELOC or a cash out refinance to get out equity from current home? The plan is to put a huge deposit (~80-100%) on new house then use the cash flow from the current home to pay itself off.

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The problem with HELOCs are the variable rates. Unless you think they’ll can pay down the loan quickly (a few years), a cash out refi will likely make more sense.

The benefit of a HELOC in this case is you can underwrite one at a cheaper rate while living there. That becomes hard (or impossible in Texas) once it’s an investment property.

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Yes, you can do it now. You can’t do it once they move.

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I would do cashout refi to lock in the rate. If the rate drops enough, you can refi again in the future.

Rates are lower when your LTV is lower, like under 50%.

HELOCs are always a gamble and best really only for shorter term debt

Easy equation;

HELOC: use for flips. In and out opportunities. Rate is ADJUSTABLE. Pay off heloc at deal exit and keep the profits.

Home equity loan: Use for rentals. Long term investments. Rate is FIXED. As long as cash flow from new investment covers the debt service for the loan (pays off the loan over time) you are net positive. Or wait for appreciate/ debt pay down to refi and pay off the loan.

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