Cash Out Refinances vs HELOCs

This week’s question comes from Ricky on the Real Estate Rookie Facebook Group. Ricky is asking about the pros and cons of using a cash out refinance vs. using a HELOC (home equity line of credit), especially since you can pay down a HELOC and use it over and over again.

Many real estate investors take advantage of HELOCs since you can get them for your primary residence or a rental property. That being said, HELOCs can come with variable interest rates and can be closed once up for renewal.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

This is Real Estate Rookie show number 72. My name is Ashley Kehr and I am here with Tony Robinson. And today we pulled a question from the Facebook group. I actually asked this morning if anyone has a topic or question idea for us, and we got a huge response. So Tony, which one did we pick to talk about today?

Yeah. So we definitely got a lot, but today’s question comes from Ricky [Odufour 00:00:29], and Ricky, I hope I got your last name right there, but here’s Ricky’s question. Why do we not see more people talking about using a HELOC on their properties versus a cash out refi? HELOCs allow you to not have to pay interest until you use it and you can pay it down and use it over and over and over and over again. So, Ashley, I guess we can talk a little bit about potential pros and cons of a cash out refi versus HELOC and give our opinions. Now I know you’ve got a line of credit that you’re closing on here shortly. So why don’t we start with that?

Yeah, so probably three years ago, I think I did my first line of credit and it was actually on my old primary residence. We rent that out now and we put a commercial mortgage line of credit on it. So it was filed as a mortgage. I had to pay mortgage tax on it, but it works as a line of credit. And then tomorrow, actually, I am closing on a commercial line of credit that has two duplexes, that are held as collateral for that line of credit. So I haven’t done one on my primary residence because I just want to have my home paid off free and clear. So I’m not tackling any more debt onto my home, even though it makes sense because you get a way better interest rating and way better terms. So I am really familiar with the commercial side line of credit. For your primary residence, you definitely are going to get a better rate than a commercial line of credit on investment property.
And I had seen in the Facebook group, some people had commented how they are having trouble finding banks that will actually do a line of credit on a non-owner, occupied property, such as your investment property. And the way to go around this is to go to the commercial side of things. Talk to the commercial lenders about this instead of the residential side. So with the commercial side, this is kind of common with residential too. This is pretty much the same where your line of credit is actually, you sign up for it for so many years. And then they can actually call the line of credit or make an end and say, “Okay, you can’t pull any more off.” So that’s one of the downfalls of it, is that it doesn’t last forever. Where if you get a 30-year fixed mortgage, you’re locked into that mortgage for 30 years.
But a line of credit, you could have it open for two years. And then when it’s up for renewal, the bank could say, “You know what, we’re not going to do it anymore. We’re closing your line of credit.” And that doesn’t mean that you have $60,000 pulled off of it. You have to pay that back that day. No. They’ll actually turn it into some kind of fixed rate or variable rate, but a payment plan that’s amortized over 15 years, 10 years, whatever the bank had negotiated with you upfront. So make sure you look at that too. What are the terms of the line of credit? How can they close that line of credit? I know during COVID, a lot of people were scared that their line of credits were going to be closed on them. So they actually went and opened a line of credits, or if they had them, they already pulled the money off of it so that if the bank did close their line of credit, they at least had the cash. And then it would just roll into a payment plan to repay that money.
So that’s one downside, is that you’re not fixed into that line of credit for 20, 30 years. And then another downfall to it is that it’s hard to find lenders that will actually do the HELOC for a commercial investment property.

I’ve never had experience with a line of credit on the commercial side, but my partner used a cash out refinance on his primary residence to kind of help kickstart our investing journey together. And you hear a lot of questions about, when does it make sense to go cash out refi versus a HELOC? And in his specific situation, it made more sense to cash out refi for a couple of reasons. A, he had bought his property a long time ago, I think like 2010, 2011, he bought his property, so kind of at the bottom of the market. It had appreciated a lot since then. He also was paying a much higher interest rate than where interest rates have fallen into recently.
So for him, he was able to refinance his property, pay pretty much the same amount, but pull out a big chunk of cash. And he kind of liked the idea of having the cash ready and available at all times, as opposed to having the line of credit that you would have to draw on. So again, for him, it just made more sense because of the specific kind of situation that he found himself in. And I think for each person it’s going to vary a little bit, depending on, I guess, what options you have available to you.

Yeah. You’re going to get a lower interest rate on doing your primary mortgage, like refinancing, pulling cash out. As far as having that cash available, having it on hand, a lot of line of credits will actually give you a checkbook. So you actually just write a check and it comes right off your line of credit. So that’s kind of interesting too, if you can find a bank that will do that for you too. For my line of credit that I’ve had for quite a while now, actually, I just sent an email to the lender and be like, “Hey, can you deposit $10,000 into this account?” Or whatever the amount. I know he’ll do it for me. So if he’s on vacation, I have to kind of work around and be like, “Okay, who else can I talk to, to put that money into my account?” So I can understand where it can be a hassle.
And then for the one I’m closing on tomorrow, that’s actually a good question. I should actually see what the process is there to actually pull money off of it. But another downside too, is that for line of credit, the banks can actually charge you a fee, a yearly maintenance fee, and then you can also get charged if you don’t pull off of your line of credit. So if you don’t actually use it, they could actually charge you a fee for that too. But a lot of times, especially on your primary residence, if you decide to do a HELOC, instead of using a cashout refinance, the bank won’t charge you any closing costs. They’ll actually even cover your appraisal, a lot of times, if you do the HELOC on your primary residence. On the investment side, I haven’t found a bank that would waive closing costs and pay for your appraisal on the commercial side. And they still want that commitment fee and everything else upfront.

It’s one of the things that we want to do this year, is pull a line of credit on some of our properties as well. We’ve bought in some markets that have appreciated quite a bit over the last year and want to be able to tap into that equity so that we have it when we need it. So I might come knocking on your door, Ash, when we get ready to pull that commercial line of credit.

Yeah. And so when you do a cashout refinance or you put a mortgage on a bunch of properties, so that’s called portfolio loan, where you have these bunch of properties, but you have one mortgage payment for those properties. I did do that before, and I’m kind of hesitant. Because if I want to pay one property off, because I want to lose $500 in mortgage payments, I just pay that property off. But if you do the portfolio loan, you pay down a huge amount, your payment stays the same, no matter what, you can go to the bank and say, “Hey my mortgage is this amount, but my equity is this amount. Can I take this property and pull it out?” And they’ll say, yep. But you’re still, have enough value there for that loan. You can pull property out.”
But as far as getting rid of your payment, I like the idea of having my mortgage as separate. So if I wanted to get rid of a payment, I can just pay that down. And so with your HELOC, I like the HELOC for doing a portfolio loan, because you’re going to be able to get a larger HELOC. And if you don’t want a higher monthly payment, you just pay off your HELOC and you’re paying interest only on them, that amount. So I think if you have a bunch of properties you want to pull together, the HELOC makes a lot more sense. And then you can control your monthly payment a lot better.

Yeah. Well, I feel like we just gave a rookie, a crash course on HELOC versus the lines of credit, or lines of credit versus cash out refinances out. Hopefully we’re able to hit that question for him. I think that’s all I got on my side. Ashley, anything else to add on this one?

No, I don’t think so. But you guys post in the Real Estate Rookie Facebook group and let us know. What do you guys prefer? Do you prefer the HELOC? Do you prefer a cash out refinance? You love walking away from that closing table with the big check. So let us know. We’d love to hear your opinion on which one you prefer and maybe like a lot of things real estate, it depends. Maybe you like one for a better situation than the other.
Well, thank you guys so much for joining us today. Make sure to send us more questions, more topics on Instagram and Facebook. I’m Ashley @wealthfromrentals and he’s Tony at @tonyjrobinson. Thank you guys so much for joining us on this Rookie Reply and we’ll be back Wednesday with a new guest.


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