No. of Recommendations: 0

I think you're on the right track, I agree with your strategy of obtaining funds for the land acquisition of the new construction by tapping into the equity of your current home.

I am thinking that this would avoid taking out the HELOC, where I would be paying interest on the money while it just sits in the bank,

I'm confused by this statement because it's just the opposite. A HELOC provides a line of credit, you draw money as you need to use it, you pay interest only on funds that are drawn. Not sure why you would be paying interest on money that was still available as a line, but not yet drawn? The strategy of a 3YR or 5YR ARM is one where you will be paying interest on money that's just sitting in the bank. On the ARM, you plan to take a loan large enough to retire the current loan balance and provide funds for the land purchase. Until you purchase the land, you're paying interest on money that you have parked. I don't think that's too expensive of a proposition to forego the ARM strategy, just confused by your statement. My own comfort level would be the ARM vs. HELOC due to the fixed rate, even with paying interest on borrowed money sitting in the bank. But there are many on these boards who would run spread sheets to analyze interest costs on parked money, what ifs on HELOC and rising interest rates, etc.

Another point worth considering, or to plan for, may arise at time of application for this new loan. The credit union will likely ask for a letter of explanation on the purpose of the cash out. If you state that the cash out proceeds will be used to purchase land for construction of a new home they may have an issue with considering your current home the "primary residence". Of course you intend to continue living there for 2 to 5 years, but you are also stating that you are planning to move. May be an issue, you may want to consider having a hypothetical conversation with the Loan Officer on the statement regarding purpose of cash out. I've heard horror stories on the tiniest detail tripping up a slam dunk loan.
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