If you’ve built equity in your properties, you may be eligible to cash it out and use it for other purposes.
Using the equity in your investment properties is a great way to fund home improvements, expand your real estate portfolio, or consolidate debt.
Many investors have two options when tapping into a home’s equity: a cash-out refinance and a home equity line of credit (HELOC). Both loans provide access to home equity, but in different ways.
Here’s everything to know to compare the cash-out refinance to HELOC to determine the best option.
Cash-Out Refinance vs HELOC: Overview
Comparing a HELOC vs. cash-out refinance is important when deciding which makes the most sense, given your goals. Each loan option has pros and cons.
A cash-out refinance is better when you have a one-time expense and need funds in a lump sum. On the other hand, a HELOC is better when you have ongoing expenses or are unsure of the total amount needed for your goals.
Here’s how they compare.
Cash-Out Refinance
A cash-out refinance is a refinance of the first mortgage on the property.
The new mortgage pays off the mortgage loan you already have, but has a higher principal balance. A cash-out refinance combines the funds needed to pay off the original mortgage, plus the home’s equity you can cash out.
The cash-out refinance is a first mortgage on the property. You receive the funds in one lump sum at the closing and don’t have access to more equity unless you refinance again.
Cash-out refinance loans have a fixed interest rate that doesn’t change throughout the term, keeping your monthly payment the same. You also pay principal and interest payments, starting with your first payment.
Process and benefits
The cash-out refinance process is similar to any financing you borrowed to purchase the property. The cash-out refinance replaces the first mortgage on the property.
Suppose you have a second mortgage on the property. In that case, you may need to…