Cash-Out Refi vs. HELOC for the Next Deal — What Are Investors Actually Choosing?

Question

Had a few clients debating this lately — pulling equity out of a stabilized rental via cash-out refi vs. just opening a HELOC and keeping the original rate intact. Rate environment makes the HELOC route tempting, but the variable rate scares some people off. Curious what others are leaning toward right now and why.

Jay Hurst · Answer

we do second postions HELOC's every day on non owner occupied properties, even in Texas which some will even tell you is illegal. Narrator: It is not.

Bryan Maddex · Answer

Incorrect!  I have 22 lenders that will do 2nd position helocs  ;)

Mike Grudzien · Answer

First you have to find a financial institution that will do a second position HELOC on an investment property.

James Driscoll · Answer

The rate environment is really what's driving this debate. A cash-out refi made a lot more sense when rates were 3-4% and the gap between the existing rate and the new one wasn't painful. Right now, blowing up a good existing rate to access equity is a hard pill for most investors to swallow, which is why the HELOC conversation is coming up so much more often.

The variable rate concern is real but manageable depending on how the investor plans to use the funds. If they're pulling equity to fund a purchase or rehab and plan to pay it down or convert to long-term financing within 12-24 months, a HELOC at today's variable rates is often still cheaper than doing a full refi and giving up a locked rate permanently. If they're treating it as a long-term facility they'll carry a balance on indefinitely, the rate risk is more meaningful.

The other thing worth considering is qualification. Cash-out refis on investment properties typically require the borrower to qualify on personal income and debt ratios, which can get tight when someone holds multiple properties. Some lenders now offer DSCR-based equity lines on investment properties (qualify on the property's rental income rather than personal income), which opens the door for investors who are cash-flow positive but show limited income on paper.

I'd lean toward the HELOC route for most investors right now unless the existing rate is already above market or the amount needed exceeds what a HELOC can realistically deliver. Preserving the underlying rate while keeping flexibility is usually the better tradeoff in this environment.

James Driscoll

Bryan Maddex · Answer

@Jack Shields  This is a great question Jack!!

1st, we need to think about your use case of the HELOC funds. Here’s why:

HELOCs are a great short-term debt vehicle. This is because HELOCs are mostly variable rate. If you had a HELOC at the beginning of 2022 at 4%, you saw your HELOC rate go up to 8.5% by the end of 2023. It is hard to carry long-term debt that can double in cost in just over a year’s time.

If you plan to pull out a HELOC and keep those funds outstanding for a long term (usually 2+ years), a fixed-rate HELOC, closed-end second, HELOAN, or cash-out refinance may be a smarter play.

If you are able to drop large sums of money against the HELOC monthly or quarterly, you can lower your average daily balance and take advantage of offsetting the higher rate with low-earning capital (think Velocity Banking method).

If you plan to draw a HELOC to buy a property, fix it up, then cash-out refi that property to pay back the HELOC so you can use it again, this is an amazing use of a HELOC and allows you to avoid the costs and delays of hard money loans.

Next, we need to think about your current 1st mortgage. Many times I talk to an investor that has a great 1st mortgage rate of 3% or 4%. We do not always want to pay those off. But if that balance is low compared to the HELOC limit you are seeking, you really have to consider the blended rate of your outstanding balances.

Simple math. You want to pull $300k out of a $500k property that has a small 1st mortgage of $100k at 3%. Goal is $300k cash.

$100,000 1st mortgage at 3%
$300,000 2nd mortgage at 9% (this is not a quote, just an example)

You take 1/4th of the 1st mortgage rate (since it represents 1/4th of the total debt) and 3/4ths of the 2nd mortgage rate (since it represents 3/4ths of the total debt).
3% × .25 = .75
9% × .75 = 6.75
Add the two and you get a blended rate of 7.5%.

That is your blended rate — the true cost of interest you are paying over the $400k of debt.

As of this post, with good credit in the 740s, you can get a DSCR loan at 75% loan-to-value with a 1.0 ratio and a 5-year declining prepayment penalty for 6.75% (6.802 APR) on a 30-year fixed rate. (780+ credit that becomes 6.625% with 6.677% APR). This is not a loan approval or commitment to lend — your rate may vary. Not all borrowers will qualify. Consult with your loan officer to get a customized quote based on your specific scenario. Equal Housing Lender. Based on $500,000 value property. (too many disclaimers needed if I mention a rate at all).

If you plan to have funds outstanding for a long period of time, a cash-out refinance is a smarter way to budget and protect your costs from increasing. If you plan to have funds outstanding for short stints at a time, a HELOC would be a better play. It could save you interest in this situation as well.

There is never a firm answer either way. Your 1st mortgage rate and balance, use of the HELOC, plans for the funds and timing, ability to get underwritten — many factors decide which is best for your situation.

Great tools:

• myFICO for scores
• Google “blended rate calculator” to see your blended rate
• Google “velocity banking method”

Ask any questions that you may have!

Amber Stout · Answer

As long as there’s a solid long term game plan to pay the HELOC back, I’d lean HELOC. Lower closing costs, interest only payments, and simple interest make it pretty hard to beat for accessing equity for the next deal, imo.  Yes, the variable rate is the downside, but my HELOC is at 7.25% right now.

I’m also doing a DSCR cash out refi that’ll be around the same rate, but now you’re talking amortized payments and higher closing costs. For me, the HELOC wins for flexibility, as long as you have a plan to get it paid down.

Bryan Maddex · Answer

I work with 22 different lenders that will do a HELOC on investment properties!

INCOME -
Some use Fannie Mae income guidelines for income review.
Some use bank statements, 1099s, asset depletion, WVOE, all of the "alt doc" nonqm methods.
Some will do DSCR heloc!
Some will do a "digital review" of income, this is generally giving clients more income than a traditional bank statement review.

LOAN TO VALUE -
Most will do 70 or 75% loan to value.
Some will do 80 or 85% loan to value.
One will go to 90% loan to value! Rates are generally in the 14s-16s, but this can be way cheaper than hard money loan points and origination fees for short term needs!

TERMS -
Almost all do interest only payments for 3 to 5 years, some up to 10 years.
Most have a 3 or 5 year draw term. 3 can go to 10 year draw term, 2 of those actually do 30 year draw terms (but the limit starts to reduce each month after the first 10 years by 1/240th of the limit).
Most are tied to Prime and are variable rate.
2 are tied to SOFR.
A few offer fixed rate options.

PROPERTY -
All will do a single family home. Some will do 2-4 units without limiting your loan to value, others will do 2-4 units but at reduced loan to value.
Some will close in an LLC.
A few will close in a Trust (inter vivos trust).

CREDIT -
Some will go as low as 600 credit score.
Most want a 660 or 680 minimum credit score.
Some want 700-720 minimum credit score.
Some use your middle Mortgage Score (Fico 5, 4 & 2 scores).
Some use your Fico 8 Score (usually your credit cards show you a Fico 8 score).

You can see all of your Fico scores by going to myfico dot com and paying for the advanced membership for $29.95. This updates mortgage scores once a quarter.

Ask any questions that you have! Gone are the days that it is hard to find a heloc on investment properties.

Cash-Out Refi vs. HELOC for the Next Deal — What Are Investors Actually Choosing?

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