{"id":121825,"date":"2020-11-14T05:00:33","date_gmt":"2020-11-14T12:00:33","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=121825"},"modified":"2024-02-13T15:33:09","modified_gmt":"2024-02-13T22:33:09","slug":"cash-out-refinance-simple-math-heloc","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/cash-out-refinance-simple-math-heloc","title":{"rendered":"Cash-Out Refinance: The Simple Math Behind a HELOC"},"content":{"rendered":"<p>BiggerPockets guys and gals, let&#8217;s talk about cash-out refinancing. Back by popular demand!<\/p>\n<p>We&#8217;re going to talk a little bit about the pros and cons, the mechanics, what a refinance is, what a cash-out refinance is. Let&#8217;s get to it.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/9YpSNTZUuDI\" width=\"560\" height=\"315\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>OK, the cash-out refinance. Now, <a href=\"https:\/\/youtu.be\/FBuEvDndFPg\" target=\"_blank\" rel=\"noopener noreferrer\">we did a video before<\/a>, discussing a little bit about the cash-out refinance. It got more into the weeds about what it is and how we did it in an example.<\/p>\n<p>Today, we&#8217;re going to talk a little bit more high level about what a refinance is and how you&#8217;d actually go to your bank (provided you have equity in your home) to engage in a cash-out refinance.<\/p>\n<p>The best thing to do when talking about cash-out refinance is to break that down to its simplest form\u2014and that&#8217;s just the refinance of a home. A lot of people hear this term, and I think it confuses them. But it really isn&#8217;t that complicated.<\/p>\n<h2>What Is a Refinance?<\/h2>\n<p>It&#8217;s basically the replacement of an existing mortgage. That&#8217;s right. It&#8217;s not a redo. It&#8217;s not anything more complicated. It&#8217;s the replacement of your existing mortgage with a new mortgage.<\/p>\n<p>And why would somebody do this?<\/p>\n<p>Oftentimes, what happens is people have a mortgage at a high interest rate compared to today&#8217;s rates.<\/p>\n<p>So, for example, you might have a mortgage that is at 7.5 percent. Today, you could get it at 4.5 percent. That might be the reason you go to the bank to refinance\u2014you&#8217;re achieving that lower rate.<\/p>\n<p>But that&#8217;s not really what we&#8217;re talking about today. We&#8217;re talking specifically about a cash-out refinance. This is slightly different and applies more to real estate investors.<\/p>\n<h2>What Is a Cash-Out Refinance?<\/h2>\n<p>So, what that is, is we&#8217;re trying to take equity that has built up in a property we currently own, and we&#8217;re going to use it. And what we&#8217;re going to use it for is really up to us. That might be buying a new property, doing renovations to an existing property, or it might be some other strategy with regard to investment.<\/p>\n<p>But ultimately the goal is pulling money out of existing properties.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/cash-out-refinance-vs-heloc\" target=\"_blank\" rel=\"noopener\">Cash-Out Refinance vs. HELOC: What\u2019s the Difference?<\/a><\/em><\/p>\n<p>I&#8217;ve got an example. Alright, we&#8217;ve got our friend Mike. Mike bought a $500,000 duplex. Today, Mike&#8217;s property is worth $600,000.<\/p>\n<p>Now, when Mike purchased the property at $500,000, he put 20 percent down (or $100,000).<\/p>\n<p>How many of you know LTV, or loan to value? In this example with Mike, he&#8217;s got $400K in debt aka the mortgage. He has $100,000 in equity. So, he has an 80\/20 LTV.<\/p>\n<p>Good for Mike. That&#8217;s fantastic.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-109430 size-main-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/04\/Hard-Money-Loan-Title-Image-e1554828209530-1078x516.jpg\" alt=\"money-investor\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/04\/Hard-Money-Loan-Title-Image-e1554828209530-1078x516.jpg 1078w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/04\/Hard-Money-Loan-Title-Image-e1554828209530-702x336.jpg 702w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p>Mike&#8217;s property now is worth $600,000. Bought it at five hundred; it&#8217;s now worth six. He built up a $100K worth of equity.<\/p>\n<p>Now what?<\/p>\n<p>What he wants to do is take a portion of that. So, he goes to his bank. Banks are not going to let you take the whole $100K. They&#8217;re going to have certain loan to values that you have to stay within. That might be 80\/20, that might be 70\/30.<\/p>\n<p>In this example, let&#8217;s assume that Mike can get an 80\/20 loan to value. That means he can take up to 80 percent of his built-up equity.<\/p>\n<blockquote><p>$100,000 x 0.80 = <strong>$80,000<\/strong><\/p><\/blockquote>\n<p>What he does is he goes down to the bank. The $600,000 of what it&#8217;s worth today is appraised by the bank. They agree.<\/p>\n<p>He gets now $80K on his cash-out refinance. But it doesn&#8217;t end there, because you really have two options with a cash-out refinance:<\/p>\n<ol>\n<li>You could add to the existing mortgage of $400,000. That would mean that right when he gets that, he starts making monthly payments.<\/li>\n<li>Or he could do something called a cash-out refinance and utilize a line of credit\u2014or a <a href=\"https:\/\/www.biggerpockets.com\/blog\/home-equity-loan-grow-real-estate-portfolio\" target=\"_blank\" rel=\"noopener noreferrer\">home equity line of credit<\/a>.<\/li>\n<\/ol>\n<p>The reason many investors go the HELOC route is if you don&#8217;t utilize any of that equity\u2014that means you don&#8217;t actually take money out of the line of credit\u2014you don&#8217;t pay any interest on it.<\/p>\n<p>The other benefit is that these are interest-only loans. And that just means they&#8217;re not amortized.<\/p>\n<p>If you have a 4 percent interest rate and you take out $100,000, that&#8217;s $4,000 payment for the year. Just the $4K\u2014nothing in addition to that (unless you elect to).<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=opt\" target=\"_blank\" rel=\"noopener noreferrer\">The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Strategy: A Primer for Investors<\/a><\/em><\/p>\n<p>So, Mike&#8217;s feeling pretty good.<\/p>\n<p>To back up, what did we have here? We had a guy who bought a property for $500K. It&#8217;s now worth $600K. Bank told him he could take 80 percent of that gain of that $100,000. He pulled out $80,000.<\/p>\n<p>Now, what do you use that money for?<\/p>\n<p>And that&#8217;s where this video is going to fall short\u2014because we&#8217;re not talking about what you can use the money for. There&#8217;s a number of things you can do with that money.<\/p>\n<p>Like we mentioned, you can go buy more property. You can do renovations. But really, that&#8217;s the snapshot of the cash-out refinance: how to do it, where to go and do it, and what you can actually take out of your property.<\/p>\n<p>For simplicity, what I did here is I didn&#8217;t talk about interest rates. Oftentimes, when you do a cash-out refinance and you do it through a line of credit (a home equity line of credit), it might be the prime rate plus a certain percentage point. I don&#8217;t want to get too complicated though. I just want to kind of give you an idea at a high level of what a cash-out refinance is.<\/p>\n<p>&#8216;Til next time!<\/p>\n<p><a href=\"https:\/\/www.youtube.com\/user\/BiggerPockets\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-114268\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/6.jpg\" alt=\"ad-youtube-channel\" width=\"706\" height=\"125\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/6.jpg 706w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/6-300x53.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/6-702x125.jpg 702w\" sizes=\"auto, (max-width: 706px) 100vw, 706px\" \/><\/a><\/p>\n<p><em>Questions? Comments?<\/em><\/p>\n<p><strong>Let&#8217;s talk below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Let&#8217;s get into cash-out refinancing. Back by popular demand! We&#8217;re going to talk a little bit about the pros and cons, the mechanics, what a refinance is, and what a cash-out refinance is. Instead of getting complicated, we&#8217;ll break it down to its simplest form. <\/p>\n","protected":false},"author":201209,"featured_media":114520,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7404],"tags":[],"class_list":["post-121825","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-refinancing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/121825","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/201209"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=121825"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/121825\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/114520"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=121825"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=121825"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=121825"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}