HELOC vs. Cash-Out Refinance for Growing Your Portfolio – Episode 1032

In this economy, most American homeowners are flush with equity. Having plentiful equity in your home is beneficial for many reasons. It can be a great tool for reaching multiple financial goals, whether you’re trying to pay off debt, lower the principal balance on your mortgage, or buy rental real estate.

If you’re considering using your home equity to grow your real estate portfolio, your options include taking out a home equity line of credit or a cash-out refinance. But how do you decide between the HELOC and the cash-out refinance? On this episode of Investing in Real Estate, we’re going to unpack both of these options.

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Let’s start with the Home Equity Line of Credit
A HELOC is a revolving line of credit, meaning it works similarly to a credit card. It uses a variable interest rate, which is unlike many other banking products. The terms of a HELOC are typically going to give you access to around 80% of your equity. Additionally, there is what’s called a “draw period” where you can access funds. During the draw period, typically you’re only going to be making payments on interest. Then once the determined draw period is over, the credit line goes into full repayment with monthly payments made on both the principal and interest.

Cash-Out Refinance
A cash-out refi is when an existing mortgage is refinanced. When you get a cash-out refinance, you’re essentially getting a brand new mortgage for a higher amount than the initial loan.. The original loan is then paid off, and the difference between the original loan amount and the new loan is what you keep in cash.

In today’s economy, the HELOC comes out on top as the best way to access your home equity. Here are a few reasons why, in my opinion, the HELOC is a better tool than the cash-out refinance.

1. Rates. Some people are hesitant about the variable rates that HELOCs offer. According to Bankrate, current rates are hovering around the 8% mark. However, it’s important to remember that this number is an average. Some lenders may allow you to lock in lower rates. You also may be able to find introductory rates.
2. Overall price. When you take out a HELOC, you can take out a loan amount of exactly what you need. A cash-out refinance, however, essentially buys you an entirely new mortgage at today’s rate. If your existing home loan is locked in at a decent rate, it likely would not make sense to entertain a cash-out refinance. A HELOC, though, is going to give you a second payment in addition to your mortgage. Unless you’re taking out a very sizeable loan, the numbers will probably favor the HELOC.
3. Repeatability. One of the major benefits to the HELOC is that it’s a revolving line of credit, similar to a credit card. If you’re intentional, you can get a lot of bang for your buck while using a HELOC to reach your goals. The HELOC is a great option for an investor who wants to rinse and repeat.
4. Shorter timeline. In comparison with a 30-year mortgage, a HELOC repayment period is usually in the 10-20 year range.

For investors though, there’s one big drawback. It can be difficult to find a HELOC on a rental property. But just because it’s hard, doesn’t mean it’s impossible. There are a lot of great lenders out there looking to do deals. It’s just going to take some tenacity on your end.

I hope this info gave you some insight into the world of equity products and how to use them to reach your financial goals. However, if you still have lingering questions about how equity works or how you can use your equity to reach your financial goals, check out this next video: The Ultimate Guide to Leveraging Your Home Equity to Invest.

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