Should You Refinance Now? + The Greatest HELOC Hack Ever

Dave:
Mortgage rates are coming down or are they? A few weeks ago we were all getting excited because the Fed cut interest rates and mortgage rates actually dropped to their lowest point in 18 months. But since then, and as I warned was likely to happen, rates started to creep back up. So the mortgage rate rollercoaster continues, but there are some really interesting things going on right now. Refinance rates are looking better than they have in a long time. There’s some pretty interesting HELOC products out there, and it sort of begs the question, is now a good time to refinance or otherwise pull equity out of your deals? Today in our deep dish episode, we’re exploring all things lending.
Hey everyone, it’s Dave and today, since we’re talking about refinances, HELOCs and other borrowing options for investors, I’m going to bring on an expert. She’s been on the show a couple times. You may have heard her before. Her name is Chaley Ridge and she’s a mortgage lender and investor and she specializes on working with non-owner occupied, so specifically investor loans. So she knows a ton about the specific lending and borrowing options that are available for investors like you and me. And in today’s episode, Chile and I are going to talk through the factors investors should consider if they’re thinking about a refinance, whether the potential for rates to drop further than they have at this point means you should wait to refinance. And lastly, we’re going to talk about a trick or a hack that you can use on an investor heloc. I didn’t know this at all and it’s pretty amazing. You could use this trick to free up liquidity in your portfolio while minimizing your interest or paying very, very little interest on a line of credit. It’s pretty incredible. I’m excited for you all to hear about it. So let’s jump in. Caeli Ridge, welcome back to the BiggerPockets podcast. Thanks for being here. My pleasure, always Dave,

Caeli:
Thanks for having me.

Dave:
I got to admit, when we scheduled the show and we reached out to you to come back on, it was a very different looking climate and we had this idea for a show we’re going to talk about is it time to refinance? And this was a couple of weeks ago when rates were down 6.1, 6.2. Now we’re in the middle of October and rates have shot back up. So it kind of destroyed my idea for this episode, but I think we still have plenty to talk about in terms of mortgage rates.

Caeli:
Yes, I agree. The reverse effect of that Fed fund rate announcement September 18th. People have been real confused by those soundbites. So yeah, we have some things to unpack.

Dave:
Alright, well let’s just start there. It was about a month ago where the Fed cut their federal funds rate 50 basis points and although it wavered that first day, we did see rates start to tick down to the lowest sixes, lowest. It’s been in quite a while and things were looking pretty good. Actually, let’s just start there. When rates were lower, did you as a lender start to see an uptick in demand for purchases? Refinances all the above

Caeli:
For us. I’ve been seeing the writing on the wall where we’re getting more applications probably as late to go as July, early July in anticipation. And certainly, yes, there was probably that weak period of time between when the announcement actually came and things started to take another form that we saw a little bit more activity. But overall, I think investors are feeling fairly optimistic and even still rates are lower than they have been. So I think that we’re on the right path.

Dave:
Okay. Well that’s optimistic. And what’s the profile of people who were starting to jump back in? Was there any pattern

Caeli:
On average overall over a 20 year career? I might go as far as to say that the balance between refinancing largely cash out, these are investors that are looking to harvest equity, et cetera, refinancing, cash out, refinance and purchase has been pretty equal over the years. I don’t know that I’ve seen any one particular period of time where one has massively outperformed the other. I mean if we go back to pandemic rates, even then a very nice split between purchasing and cash out refinancing,

Dave:
And I’m curious what type of loans people were refinancing out of. And again, the premise of the show is to talk about refinancing. This is a question I personally get constantly. It’s like now a good time to refi. Is this the time? So was it just normally scheduled refi like people who were doing a burr or renovation and wanted to just get a different type of loan or are these people who are buying long-term properties and are just trying to improve their rate?

Caeli:
So rate and term versus cash out refi, I would put the cash out refinance at a 70 30 if we’re looking at refinancing just for the sake of refinancing to reduce an interest rate or maybe get out of an arm, maybe buy out a partner, whatever it may be. I would say more often than not it’s for a cash out reason. In fact, statistically speaking, when we talk about mortgages related to investment properties, the shelf life, I think Dave, you and I have talked about this, the shelf life is about five years. So whatever the need is, whether it is harvesting the equity, borrowed funds are non-taxable or improving the term or any number of reasons, they just don’t have the shelf life that may a primary residence would have.

Dave:
That’s super interesting and yeah, we’ve brought this up before but I just want to make sure everyone understands that. Normally I think on a residential owner occupied, it’s closer to 10 years is like the average.

Caeli:
I think it’s right now seven, a little over 7.4.

Dave:
Okay, so those are longer and therefore in your world more profitable, right? Because you have more time to collect interest,

Caeli:
Right?

Dave:
So when you have a more investor style loan, even if it’s on a residential property, this helps explain to people who are wondering why investor loans are a little bit more expensive in terms of interest rate typically than an owner occupied loan. There are many reasons for that, but this is one reason is that because the bank, in order to maximize profit, the lender wants to ensure that they make the same amount of profit on this loan needs that higher interest rate to offset the shorter duration that they’re receiving interest payments for.

Caeli:
Absolutely that and points both of those factors. And you’re right, there’s lots of reasons that the non-owner occupied investor property is going to have a higher rate, but that certainly is one of, yeah.

Dave:
Alright, so a month ago things were looking the best. They’ve looked in well over a year at 6.1, I think it was actually the lowest we’ve seen. Let’s see back to about January of 2023 and since then rates have gone back up rather sharply and I should say, let’s get this in context. As of today, according to Mortgage News daily, they’re about 6.6%. So they’ve gone up 50 basis points still well below where they were just in July. So it’s not like they’ve really completely, I think that’s important for everyone to understand. But maybe Jayla, you could help us understand why these rates have gone back up,

Caeli:
The metric that the feds are looking at and Wall Street, obviously Wall Street has a way of interpreting where they think the feds are going to place their Fed fund rate. So a lot of this is in a lag. It’s predetermined prior to any announcement from Mr. Jerome Powell who those that may not be familiar with that name is the Fed chair. But I think that a lot of it is going to have to do with the metric, where is the CPE? Where is the CPI, the jobs report. All of these things are coming in much hotter than we would’ve otherwise expected. And remember, wall Street wants a strong economy. Everybody wants a strong economy by all metrics. We are in a very strong economy, but they also want the feds to reduce the interest rate while what I think a lot of people miss or just don’t connect in the dot, they’re not putting a lot of their time and focus into this idea of rates and economy. The stronger the economy is guys, the higher the interest rates are going to be. Unfortunately in my business I am, I wouldn’t say rooting for a bad economy, but the worse the economy is doing, the better our interest rates are and the better the mortgage industry is going to fare. So you can’t have it both ways.

Dave:
Yeah. Let me just for a minute explain this because this confused people and rightfully so. It is complicated because we talk about unquote interest rates and the Federal Reserve, like interest rates are one thing, they’re not one thing. There are all sorts of different interest rates across the economy and the Fed only controls one of them. It’s called the federal funds rate. It basically sets the baseline for interest rates and a lot of other interest rates and investing behavior sort of flows from where the Fed sets their rate. And when we talk about residential mortgages, the actual closer relationship is not to the federal funds rate, but is to bond yields. And for residential owner occupied mortgages, that is typically for a 10 year US treasury. If you’re unfamiliar with this, it’s just a bond. It’s basically investors lending the US government money for some period of time in this instance 10 years at a certain interest rate.
So mortgage rates are really closely tied to these treasuries and treasury rates go up and down based on investor demand. When a lot of investors want to invest in bonds, yields typically go down. Basically it’s just supply and demand. A lot of investors want to invest in bonds and so the government has all these different options who they can borrow from and that means they can pay less interest because so many people want it. On the other hand, when not a lot of people want to invest in bonds, that pushes deals up because the government has to raise the interest rate in order to attract investors. And whether or not people want to invest in bonds, as Chile said, has a lot to do with the broader economy. When there is fear of a recession or the economy is weakening, investors tend to want to put their money somewhere safe. Bonds are very safe, and so that increases demand for bonds and it pushes down yields and it takes mortgage rates down. So as Chile just said, if you are rooting for a strong economy, you’re probably going to see rates maybe come down a little bit, but they’re going to probably stay relatively in the range where they are now. Whereas the only way, at least I see rates going down significantly is if we see a big break in the labor market and much higher recession risk then is currently flashing in the economy.

Caeli:
Beautifully said, my friend perfectly said,

Dave:
Well, good job. I’m sweating now I’m sweating. It’s like how quickly could you explain bad yields to It’s a

Caeli:
Rabbit hole.

Dave:
Yeah, it is. All right, we got to take a quick pause for some ads. We’ll be back in a few minutes. Welcome back to this week’s deep dish. I don’t know about you Jaylee, but I find that right now bond investors are more fickle than normal and every economic data release that’s like up and down, so you got one good jobs report and then yields go up, we get one high inflation report and then yields go down. We’re just constantly chasing this information when it’s so unclear and that at least to me is what’s leading to all of this volatility in mortgage trades

Caeli:
Well and all the variables that we try to predict for, but there’s really just no predicting we can layer in the election, we can layer in the Middle East. I mean there’s so many other, we haven’t even scratched the surface on how many of the different variables or metrics that play into really where this thing is going to go. So just to kind of segue back into the answer to is now the time to refinance or not? Listen, if I can just take a second and pepper my response to that question for those brand new investors or potentially not totally informed yet investors, my answer is going to sound like a sales pitch that I’m trying to get everybody to refinance. For those that have taken some time to be informed or are seasoned, more seasoned investors, they’re going to know and understand it’s always the right time to refinance depending on the investment. It’s the key, and I say this maybe five, six times, every time you and I talk, they have to be doing the math. The math will not lie, and you’ve got to be looking at the investment and doing the appropriate math, and that includes appreciating rents and property tax benefit. There’s lots of nuance that goes into how you’re going to come out with a plus or minus when you are running the right math.

Dave:
I totally agree. The math is what’s important and sort of the context of how else you’re going to spend your money and sort of how you’re allocating resources. I guess the general sentiment at least that I hear is people are waiting for rates to go down a bit more or at least down to where they were a couple of weeks ago to 6.1, 6.2%. Do you think that’s wise betting on a come?

Caeli:
I’m not sure. I think it depends on what the use of the refinance is, and I know that this sounds vague and it also adds to the uncertainty because nobody’s going to give you a yes or no answer, and if they are giving you just a black or white, then there may be an agenda. Okay, it’s very specific or subjective to the circumstances. So is it wise to wait for the rate to come down a quarter point? Well, I don’t know what is the loan size? Is the loan size 150,000 and the difference in payment for that quarter of a point is six bucks a month? Hell no, it’s not wise because the adverse could be happening and what are you giving up? Let’s say you’re pulling cash out and let’s say that you’re waiting two months to get this cash and then you’ve missed out on these opportunities or So the variables that go into that are important to moderate and make sure that you’re doing the math.

Dave:
Yeah, totally. I think especially if you’re doing that cash out refi, it really all comes down to what you’re going to use the money for. Because if you’re just going to take it out and put it in a savings account, you can do the math and see if the yield on that savings account is going to be better or worse than not refinancing. I’ll actually just give you an example of something I’ve been thinking about. Maybe chaley, you can give me some advice here, but I am in a fortunate position where I wanted to buy a deal and it was competitive a couple months ago and I bought it for cash just to be competitive. And I’ve actually not reffind the plan has always been to finance it, but I haven’t because I haven’t found a deal that I do that would necessitate me taking the money out of that deal because right now, having no financing on it, I’m earning something.
I think it’s close to like a 10, 11% cash on cash return. If I refinance it, I will probably, that deal will go down to a 7% cash on cash return, which I’m still happy with, but I’d take that money out and then just put it in a savings account and that would earn 4.5% right now given yield. So why would I do that right now? I would just rather keep earning the higher yield on my money right now until I need that deal. So it’s not like there’s a yes or no answer, but that math at least is not super complicated. One has a better cash and cash return than the other, so I’m going to wait until I find something better to do with that money and hold off on refinancing for now.

Caeli:
A hundred percent in agreement. Here’s my devil’s advocate, or here’s how I would counter that. The downside of getting the cash now and not using it, obviously to your point is you’re going to be paying interest on funds that aren’t being used, right? And you’re going to lose some of the return that you’d be getting otherwise. The downside on the flip, there’s two pieces I would add to that is that if you need something, if something comes up tomorrow that you want to use those funds for, it’s illiquid and it’s going to take you a good 30 plus days to get at it, you’re going to lose that opportunity. Okay? Is that the end of the world? Maybe not. I don’t know. But what I would suggest is to liquidate those funds, one of the ways that you could do that as an investor is go look for first lien heloc, right? So that you’ve liquidated it, now you have access to this line of credit. I am a huge, huge fan of, well, the product that we have is called the All-in-one first lien heloc, where now you’ve created a scenario, you’ve got this line of credit at your disposal, you’re never going to pay interest unless you’re using the balance or using some of the lines. So that’s the best of all worlds as far as I’m concerned.

Dave:
That is a good point, and let me just want to make sure everyone’s following this, but basically I have this equity tied up in this deal. I bought it for all cash. I have several options. One is to just let it sit, which is what I’ve been doing. The second is to do a cash out refinance. Basically take, let’s just say I keep 25% of my equity in the deal. I take out a loan for the other 75%, then I just put it in a high yield savings account money market account until I put it in my next deal. Or another way to tap equity in a real estate deal is to use a heloc. This is a home equity line of credit, and that is different from a mortgage because it is not money that I have to use. I just have the option to use it.
So basically, if I took out a heloc, maybe I have a hundred grand that I could choose to put in another deal because I’ve applied for it and received this line of credit, but I don’t start paying on that until I invest it. And so what CHALEY is saying is if I used a heloc, I could still earn that higher return, but I’m more ready to take advantage of future opportunities. I have the HELOC in place and then I can use that basically however I see fit as new deals or new opportunities arise. A hundred percent, yes, it’s time for a break, but stick around because later in the show, Chaley is going to share a pretty genius mortgage hack for how you can free up liquidity and lower your interest payments at the same time. We’re back on the BiggerPockets podcast with Jaylee Ridge. Just out of curiosity, what’s the difference in rates between a cash out refi right now and a HELOC

Caeli:
Cash out refi pulled rates before we got on here? Cash out refi at 75% and remember you guys, the LLPA is important loan level price adjustments. So the variables that we are talking about to quote an interest rate are things like loan size, loan to value, property type credit score, all of these things matter, but just baseline, let’s say cash out refinance, you’re probably going to be in the high sixes, 6.7, 6.875 on average. Okay. Single family residence. That’s

Dave:
Way better than it was.

Caeli:
It’s still great. Yeah.

Dave:
Yeah. Even though they’ve come up a little bit, that is a point and a half lower than what it was, what, a year ago?

Caeli:
Yeah, totally.

Dave:
Yeah.

Caeli:
Borrowed funds are non-taxable. As I said before, points that you would pay also can be as a tax deduction on that scheduling for investment property. So let’s just say high sixes, the first lien HELOC currently is fully indexed at 7.9. Fully indexed means you’ve got an index variable, that one moves and a margin does not move, it’s fixed. The index on that product is the one year CMT, which is code for the US Treasury.

Dave:
Okay? So in exchange for the benefit of liquidity that you were just talking about, giving me that flexibility to use the equity in my deal as our example, you’re basically paying a point higher in interest rates.

Caeli:
Yes, but let me add something. So this may be a bit of a rabbit hole and I don’t know.

Dave:
I like

Caeli:
Rabbit holes. Okay. Okay, so the arbitrage here, you guys interest on any open-ended revolving account? In this case we’re talking about a heloc, okay? Interest is calculated daily every single day within a 30 day billing cycle. And because this is open-ended you now as the consumer are in control, the all-in-one is very unique in that it doubles as both the line of credit and checking and savings. So whereby ordinary income from all sources can be utilized to deposit in this checking account where the balance of the HELOC lives driving it down dollar for dollar. Because remember I just said that interest accrues every day. So if you’ve got a hundred thousand dollars balance and you make $10,000 a month and you drop that $10,000 a month in on top of the a hundred grand, now you are calculating interest on $90,000, not a hundred thousand dollars. So you leave that 10 grand in there for 29 days out of a 30 day billing cycle. I’m abbreviating. Okay? So you’re only paying interest on $90,000 for 29 days. You’re going to use a card, for example, for every living expense that you have down to a stick of gum on day 30 before the credit card accrues any interest, you’re going to pay that credit card off. Let’s say it’s nine grand. I love that smile base. Yes.

Dave:
This is a great trick. I love it. I love where you’re going with this. Yes, okay,

Caeli:
Yes. So you’re going to pay off your credit card that you racked up nine grand on, so you have a thousand dollars left over of the 10,000 that you put in originally. Fast forward to day one, month two, your outstanding balance is now 99,000 because you had a thousand bucks left over fully accessible

Dave:
24 7,

Caeli:
Nothing changes. You’re just now utilizing a different vehicle to greatly diminish the amount of interest that you’ll accrue. So to your point, it can do so much more than just having this access, this liquidity now that you won’t pay interest unless you’re using it. But you can also forget about the 6.8 fixed rate and the 7.9 HELOC rate. It’s not about that anymore, guys. You really need to change your thinking. It takes a minute to connect the dots. It’s complicated, but when you get it, it’s powerful.

Dave:
Okay, I love this idea. This is a great rabbit hole, and let me see if I could do my best to summarize what you’re saying.

Caeli:
Okay.

Dave:
A revolving line of credit works differently than a mortgage. When you take out a mortgage, you have a fixed amount that you owe and that you’re paying on. For most people. When you get fixed rate debt, same payment every single month, a revolving line of credit is inherently different. It’s similar to a credit card. You are paying interest on how much you’re using at a given time. And so what Chaley is saying is with this particular HELOC you can take out, we’re going to use a round number, a hundred grand, this is your heloc, and say you use it for buying a rental property, but if you get your paycheck deposited into this account, and you can do that with this account. Let’s say your paycheck every month is $10,000. That’s a lot of money, but we’re just using round numbers. So you put your paycheck in there on the first of the month, that reduces your principle that you’re paying interest on to $90,000 instead of a hundred thousand dollars.
And the reason Shaley was saying you put all your money on your credit card is that way that $10,000 you deposited stays in your bank account for basically the entire month. Then you pay off your credit card, your balance goes up a little bit for a day or two, and then you deposit your next paycheck in there and you reduce your principal. This is such a good, it’s like I really love credit card hacks and balancing. This one’s like a HELOC hack. It’s a really great way to just minimize what you’re owing every single month without really, you’re not changing anything

Caeli:
About your lifestyle at all. Nothing. And this particular product is so great that whatever tech you have or automation you have with your B of A or Chase or whatever, exactly the same, it’s housed by an FDIC insured bank after closing. So online bill, pay, debit cards, numbers, paper checks, whatever you have today with your Wells Fargo account, exactly the same, you guys, you’re simply transferring from this vessel to this vessel. Now you’re in control. You’ve created an environment where you’ve become your own bank. Wow. Right? You’re now in control. It’s my absolute favorite product, especially for investors. So real quickly, not to go too off on a tangent, but remember, as investors, most of us have these gross rents sitting idle that you can utilize for 29 days. So you think you just have your $10,000 of ordinary income, maybe you got another $20,000 of gross rents

Dave:
Before

Caeli:
Mortgage payments go back out the door. You’re going to use that and diminish that balance and that interest as well before you make those mortgage payments. There’s so many cool things about this product. I cannot speak highly enough about it. It’s my absolute favorite for the right individual, and it does not work for everybody. When you say the right individual, who is the right

Dave:
Individual

Caeli:
Variables aside, because there’s exceptions to every rule, but I would say on average, the individual that has at least 10% leftover at the end of the month after everything goes back out the door. So in our example, let’s say it’s 10 grand. If you’ve got about a thousand bucks leftover after all your expenses, food, gas, utilities, everything, typically you’re going to do well with this loan product in comparison to current interest rates, 30 year fixed rates. If you’re going to go side by side comparison, it’s going to kick what out of a 30 year six and a half percent

Dave:
Just by reducing that principle by 10 ish

Caeli:
Percent.

Dave:
Just using our numbers from before, it could be more like you might be able to do it by more or less, but just in our example, you would reduce your principle by 10%. That obviously lowers your interest payment and that as chaley is saying, it either makes up for or exceeds the difference in interest rate,

Caeli:
And you have full access to it if you need it for whatever you need it, however you need it. And just as another quick sidebar, so let’s just say for those listening to this that maybe have a bunch of cash sitting idle. Let’s say you got a hundred grand sitting in a checking or savings that you’re just kind of waiting on the sidelines. It’s doing very little to nothing. There are individuals that we get this loan for secured this loan for that they don’t pay any interest

Dave:
Really.

Caeli:
So they had this balance. They started with this balance, and they had this cash over here that cycles through for the majority of the month. They just drop it in there and they extinguish the balance for all those months because they have access to a lot of depository every month. They are able to utilize that to their advantage so that the amount of interest that they’re paying is little to nothing.

Dave:
Well, if that’s what I was just wondering, to continue our example, if I had a $100,000 cash reserve that I keep for personal emergency expenses, that’s not the exact number I use, but let’s just say I think everyone who’s an investor should have some amount of living expenses set aside. Most people say six months. So let’s just say my six months was exactly a hundred thousand dollars. Could I just keep my emergency fund in this savings account and then no interest on this loan?

Caeli:
Yes. That’s amazing. And you absolutely would want to, right? Yeah.

Dave:
Why wouldn’t you do that?

Caeli:
So at this point, this is when individuals will come to me and say, Hey, okay, this sounds so great. Whatever. What’s the catch? Where’s the fine print? And or how does the bank make any money if you’re not paying any interest? How are they getting compensated? Well, because this is an open-ended line of credit that is attached to your checking and savings, there is a sweep account component. So for those that may not be familiar with this, when you think about an FDIC insured bank, how they receive much of their revenue is by lending money back out at a rate of X. So if the depository institution is going to lend out $1 per the regs and rules, they have to have in deposit, $5, $10, whatever. That’s how that plus and minus works. So because this is a sweep account at midnight every night, the deposits that are in, they go back through and they’re able to show this amount in depository so they can lend out more money. So that sweep account component is where the profitability from the bank is realized.

Dave:
So they can basically, even if they’re not making interest, it allows them to lend out more money on which they do make interest. Correct. So this is still beneficial to them.

Caeli:
Yeah, that’s a better way to say it. Got it. Okay. Yes.

Dave:
No, I just want to make sure I’m holding on here. Okay. Well, this is a super cool product. Last question on it before we move on is how do you underwrite these loans? Is it sort of like A-D-S-C-R where you’re looking at the quality of the property, or is it personal underwriting?

Caeli:
Yeah. I’m glad you asked that because I always want to make a point to set the expectation. This is one of the harder underwrites a consumer is ever going to have to go through, in fact, brain damage. Okay. I want you guys to be prepared for anybody that goes after this loan.

Dave:
I’m glad you’re just giving it to us straight.

Caeli:
Yeah, there’s going to be some brain damage. The underwrite is fairly restrictive and qualification bar is set. Pretty high example, debt to income ratio threshold is 43% versus traditionally 50%. So to your question, actually, Dave, it is not A-D-S-C-R. It is vials of blood and DNA samples as I like to joke. But it’s well worth it if you can qualify and you’re the right individual for this. Any brain damage that would ensue in getting this loan well worth the rewards after closing.

Dave:
Wow. Seems super cool. Well, thank you for sharing this one with us.

Caeli:
You bet.

Dave:
Jaylee. Last question. No one knows what’s going to happen, but what are you expecting for the next couple months? Do you see rates coming down a bit more volatility or what’s your best guess?

Caeli:
So obviously pending the reports that will be used to justify another Fed fund rate cut, I do believe November, early November, they’re going to meet again and they’re going to determine whether or not there’s going to be another cut, I suspect a quarter point cut. That’s my opinion. How does that translate into our long-term interest rates, and does that mean that interest rates are automatically going to fall? Not necessarily. Overall, though, my answer to your question is I do think rates are on the way down. I think that by early 2025, I think that we’ll see some additional improvement to where we are today, but do the math.

Dave:
All right. Well, I’m sure for everyone listening, we are hoping that you’re correct on that. Jaylee, thank you so much for this very engaging and enlightening interview. I learned a lot today. I appreciate your time.

Caeli:
I love being here. Thanks for having me, Dave.

Dave:
Of course. And if you want to connect with Chaley or her company, we’ll put the contact information in the show notes. If you have any questions for me about this, you can always find me on BiggerPockets or on Instagram where I’m at the data deli. Thanks so much for listening to this episode of the BiggerPockets podcast. We’ll see you next time.