HELOC vs Home Equity Loan vs Cash out Refi

4 Replies

Hey Guys,

If I own my home outright and have no mortgage, and I want to tap into some of my equity to purchase another investment property, which of the above would be the best way to do this? My home is worth around 350k, and I only need about 120k for the investment home purchase. I've done a good amount of research but it seems like their are pros and cons to all of these loan options. Please help me understand but wouldn't a HELOC be better here because I could just draw what I need instead of getting a whole new loan on my home. It seems like the only downside is the variable rate but a lot of places let you lock the interest rate. If on the other hand I did a cash out refi would I just be able to pull out 120k from my homes value instead of getting a new loan on the entire value of the home? Maybe I'm not understanding this right so thanks for any clarification!

I think this is based on your intent of using the fund. If it's for long term investment and you are going to use the fund, refi could be a good route. An interest rate on HELOC is higher than a mortgage interest rate but HELOC gives you flexibility on using the fund. It works like a credit line. Say, you draws 120k and can pay it down in X months when you don't need it. HELOC offers flexibility for short term investing. You may need to also consider tax benefits between two options.

My wife and I have a very specialized 1st position Heloc on our property. It's tied to a zero balance sweep checking account, so all regular deposits and idle funds sit on our balance saving interest until they get swept back out for bills. It's been a great tool for us. Whenever an opportunity arises, we simply write a check from our line, then pay it off very quickly using our depositing power. It gives you 30 year access to equity, but you only pay for what you use. It sure beats signing up for 30 years of interest first amortized debt on a traditional cash-out ReFi. 
In your case, you could have that line of credit set to $280k, but you'd only draw what you needed. I'd definitely recommend checking it out as an option. 

Hi, @Pablo Flores .  I agree with @Bee Snider when she says that it depends on your plans for the funds.  First off, though, CONGRATS ON OWNING YOUR HOME FREE AND CLEAR!

If you are looking to BRRRR, then I love the HELOC for this purpose and personally use mine for this same reason. Here the HELOC will allow you to make the cash offers that could be the difference maker between a good deal and a great deal! Additionally, you can finance your rehab through the HELOC and, once you're done and the property has been rented and owned for 6 months, simply cash out refinance the new property to pay off your line. The risks here are that you don't refinance enough back out to pay off your HELOC but if you're able to budget/account for this then its an excellent tool. Every BRRRR has the risk of having to leave cash in and you just have to acknowledge that your ‘cash left in' has interest until you pay it back off.

However, if you're just looking to buy a more-or-less turnkey property with as low a rate as possible and as little cash out of your pocket without using a partner or investor, then taking the cash-out mortgage on your home to acquire the property would be the way to go. Your primary home will yield the lowest rate AND you'll now have an investment property free and clear if you choose to sell it later OR leverage it for a future investment. Accessing the equity in the property will take more time and money than the HELOC will because its readily accessible when you need it but I also understand the appeal of being able to confidently know/budget the monthly expenses without fear of a variable rate.