What's the difference between a HELOC and a Cash Out Refinance?

Question

Do you pay 2 different mortgages with either one?

Ko Kashiwagi · Answer

Hi Kingston,

With a HELOC, you are essentially opening a line of credit in addition to your original mortgage. You will have your original mortgage payment, and you will also have a payment on the HELOC if you have drawn from it. The HELOC payment is separate and in addition to your existing mortgage payment.

With a cash-out refinance, you are replacing your original mortgage with a new one, so you will only have one mortgage payment. The new mortgage will be larger than your original mortgage since it includes the additional amount you have cashed out. The single payment will cover both the original loan amount and the additional cash-out amount.

HELOC might be better if you need intermittent access to funds, while a cash-out refinance could be more suitable for a one-time need with a clear purpose.

Brittany Minocchi · Answer

You'd want to consider your blended rate and see where that falls. If you're dead set against a refi there are investment HELOC and HELOAN options, but they carry a higher risk and therefore a higher rate being in second position (likely in the neighborhood of 11%+).

HELOCs have a variable rate and function as a line of credit that allows draws, HELOANs are fixed rate and lump sum (very similar to a cash out refi, but it does NOT affect your existing mortgage).

Happy to discuss further if you have any questions, feel free to connect.

Tyler Warrick · Answer

Great question, @Kingston Yi!

HELOC: Home equity line of credit. This is in addition to your primary mortgage. HELOC is an interest only payment, an adjustable rate, and you can draw funds up and down from $0 to your total line amount. Rates tend to be higher than cash out rates (due to the lender being in second position).

Cash Out Refinance: Replaces existing mortgage and gives you cash at closing. Fully amortizing payment from the start, predictable payments, known terms. Rates tend to be lower than HELOCs/other second positions liens (due to them being in first position).

Hope this helps!

Kingston Yi · Answer

So I have 3 STR (3.5%) that are avg $60,000 annually in gross rentals and want to scale but w/interest rates higher, I don't want to cash out refi...any thoughts on how to leverage these assets to purchase 4,5,6 property's?

Christopher Harris · Answer

A HELOC is like a credit card with a variable interest rate, enabling flexible borrowing as needed, with interest payments on the utilized amount. Conversely, a cash-out refinance involves replacing your existing mortgage with a larger one, providing a lump sum in cash but potentially increasing your monthly payments. I recently got one from www.bestfinance.io/heloc/, they offered many options that other companies did not. The process was straightforward, rates and terms were flexible, and I completed my home renovations without any issues

Devin Peterson · Answer

A heloc is a repayable line of credit tied to any asset. Think of it as a credit card tied to your house. A cash out refinance is a 1st lien position restructure of the entire mortgage that allows you to pull equity out as a lump sum and all is provided at closing.

Nate Herndon · Answer

Really solid explanation from Ko.

The private side of lending is pretty scarce on HELOCs that are available to investment properties, whereas cash-out refinances are available at 75-80% LTV.

What's the difference between a HELOC and a Cash Out Refinance?

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