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Real estate investors looking to scale quickly often find themselves weighing two powerful financing tools: the cash-out refinance (refi) and the home equity line of credit (HELOC). Both options allow you to tap into the equity you’ve built in a property, but they work differently and are suited to different investment strategies. Understanding the key differences can help you choose the right approach for maximizing your portfolio growth.
What is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan, allowing you to take out the difference in cash. This can be an attractive option for investors looking to unlock significant capital for property acquisitions, renovations, or scaling a portfolio. It essentially “resets” your mortgage while providing immediate liquidity.
Pros of Cash-Out Refinancing:
- Larger Lump Sum: Access a substantial amount of cash for big investments.
- Lower Interest Rates: Typically lower rates compared to HELOCs or personal loans.
- Single Monthly Payment: Consolidates your debt into one loan payment, simplifying finances.
- Long-Term Fixed Rates: Often comes with 30-year fixed rates, providing payment stability.
Cons of Cash-Out Refinancing:
- Closing Costs: Higher upfront costs, including appraisal, origination, and title fees.
- Longer Approval Process: Typically takes 30-60 days to close, potentially missing fast-moving deals.
- Resets Mortgage Clock: Resets your mortgage term, potentially extending your repayment timeline.
- Equity Risk: Significantly reduces equity, which can be risky in declining markets.
Ideal Use Cases:
- Large-scale renovations or property acquisitions.
- Consolidating higher-interest debts.
- Funding long-term buy-and-hold strategies.
For a comprehensive guide on cash-out refinancing, check out Refinancing with DSCR Loans: Unlocking Equity in Your Investment Properties.
What is a HELOC?
A HELOC is a revolving line of credit secured by the equity in your property. Unlike a cash-out refi, which provides a lump sum, a HELOC functions more like a credit card, allowing you to withdraw funds as needed up to a set limit. This makes it ideal for ongoing projects or flexible funding needs.
Pros of a HELOC:
- Flexibility: Draw and repay funds as needed without reapplying for a new loan.
- Lower Upfront Costs: Fewer fees compared to full mortgage refinancing.
- Interest-Only Payments (Initially): Many HELOCs offer interest-only payment periods, improving cash flow.
- Quick Access to Capital: Faster approvals and closings, often within a few weeks.
Cons of a HELOC:
- Variable Interest Rates: Rates can rise over time, increasing your monthly payments.
- Second Lien Position: Typically takes a second lien position, which can complicate future financing.
- Potential for Over-Borrowing: Easy access can lead to financial overextension if not managed carefully.
- Shorter Repayment Terms: Draw periods usually last 5-10 years, followed by a repayment phase.
Ideal Use Cases:
- Small to medium renovations.
- Bridge financing between property flips.
- Emergency cash reserves for property repairs or upgrades.
For a deep dive into how HELOCs can be a game-changer for investors, explore Complete Guide to Investor HELOCs.
Which Strategy Builds Wealth Faster?
Choosing between a cash-out refi and a HELOC depends on your goals, risk tolerance, and cash flow needs. Here are some key factors to consider:
Speed of Access:
- HELOCs win for speed, typically closing in 10-21 days, making them ideal for investors who need quick access to capital.
- Cash-Out Refis take longer but provide a larger lump sum, which can be more impactful for significant investments.
Cost Efficiency:
- HELOCs generally have lower upfront costs, but variable rates can add long-term expense.
- Cash-Out Refis have higher upfront fees but offer stability with fixed rates over decades.
Flexibility and Control:
- HELOCs provide ongoing, flexible access to capital, ideal for active investors with fluctuating cash needs.
- Cash-Out Refis are better for those looking to make a single, large-scale investment.
Final Thoughts and Choosing the Right Path
Both cash-out refis and HELOCs are powerful tools for real estate investors, but the right choice depends on your unique strategy:
- Choose Cash-Out Refi if you want a larger, one-time capital injection with predictable payments.
- Opt for a HELOC if you value flexibility, speed, and ongoing access to funds.
Ready to supercharge your portfolio? Get matched with the right financing options today to start building wealth faster.
FAQs
Can I use a HELOC to buy a rental property?
Yes, HELOCs can be used for down payments, renovations, or even full property purchases, depending on the equity available. Learn more here.
Is a cash-out refi better than a HELOC for BRRRR strategy?
For BRRRR investors looking to recycle equity, cash-out refis can offer larger sums for scaling faster.
What happens if home values drop after a cash-out refi or HELOC?
Both options carry risk, but a cash-out refi locks in a fixed payment, while a HELOC’s variable rates could increase as values fall.
Read Next
- How to Use a HELOC to Scale Your Rental Portfolio Fast
- Leveraging HELOCs for Real Estate Investment Success
Unlock Your Home Equity with Figure
- 100% online application—no in-person appraisal needed
- Pre-qualify in minutes; funding in as few as 5 days
- Borrow up to $400,000 with flexible terms
- Soft credit check—no impact on your score
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
