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Cash out Refi vs. HELOC

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rated:
Hello fellow fatwalleters - 

I've currently 3 years into a PenFed 5/5 ARM at 3.375% current rate, we currently owe $258k on the house. If we were to list our house in current condition we would ask about $450k. We want to do about $50k worth of work to the house to fit our current family situation (just had a new baby, we need to make the house work better for the fam); we believe if we WERE to sell we would get at least 100% of this investment back (but we won't be selling). We are in TX if that matters.

Anyway:

Current 5/5 ARMs at PenFed are 3.125%
Current 5/5 HELOCs at PenFed are 3.75%

I'm just looking at PenFed since I'm already a member and have not had a bad experience with them, but not opposed to going elsewhere for a better deal. I'm leaning towards the HELOC because the closing costs should be dramatically less (no appraisal at PenFed), but the lower interest is certainly attractive on the Refi (large closing costs, however, are not). Looking at the 5/5 unless someone wants to talk me out of it.

Which route would you go?

Any guidance you could provide would be much appreciated.

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rated:
Bowen said:   I've currently 3 years into a PenFed 5/5 ARM at 3.375% current rate, we currently owe $258k on the house. If we were to list our house in current condition we would ask about $450k. We want to do about $50k worth of work to the house to fit our current family situation (just had a new baby, we need to make the house work better for the fam); we believe if we WERE to sell we would get at least 100% of this investment back (but we won't be selling). We are in TX if that matters.
 

  You can list it for whatever you want; what will it actually sell for? Most home renovations/addition rarely will return 100% in resale, unless you are putting in a lot of sweat equity and not counting the labor cost.

rated:
In the current market in current state, it would actually sell for $450k. With the improvements we are looking at doing, which include adding some square footage and a bathroom (without actually doing an addition), comps range from $500k (neighbors house JUST sold for this) to $550k w/ similar stats, upgrades, etc.

I said list when I should have said sold. And yes, sweat equity would be involved.

rated:
Unless there would be a big difference in closing costs, a new ARM looks like a no-brainer. Lower rate than your current mortgage, lower rate than the potential HELOC. Are you sure you're looking at rates & costs for a cash-out refi? Most lenders charge extra for that.

rated:
SlimTim said:   Unless there would be a big difference in closing costs, a new ARM looks like a no-brainer. Lower rate than your current mortgage, lower rate than the potential HELOC. Are you sure you're looking at rates & costs for a cash-out refi? Most lenders charge extra for that.
  No I'm not sure. Thanks for bringing that up. I'll have to look into that.

Edit: it looks like PenFed charges extra points for a cash out refi. I'll reach out to them tomorrow to figure it out for sure.

rated:
Third Federal has a 5/1 ARM at 2.79%, and you can relock the rate at the "then-current" 5/1 rate anytime during the fixed-rate period for just $295. And you can do this over and over and over.

We have a 3/1 that was originated at 1.99% last summer. Rates dipped to 1.74% before the second payment was due, so we re-locked at the lower rate.

Amazing product, and they did a great job on the origination itself.

rated:
The difference in interest paid on $50k over 5 years is $839. Figure you get to deduct it at 25% rate and it's down to $630ish. If you aren't going to pull the $50k out all at once in the beginning, the difference is even smaller. If the cash-out refi closing cost is $630 more than than the HELOC, it's a no-brainer. I've never done a HELOC, but if it's substantially easier and the start up costs are a little cheaper, that's probably the way to go. Either way, we're not talking about that much of a difference here.

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