HELOC vs Cash out Refi: Which is right for you?
Click Here for the audio only version on the Lady Landlords Podcast
One of our most popular topics in the Lady Landlords Facebook group is how to scale...and how to scale quickly.
Remember: There are many options out there on how to grow.
But, two of the most popular options are HELOCS (Home Equity Lines of Credit) and Cash out Refinances. Both of these strategies allow you to tap into the equity of properties that you already own. This means no more saving week by week for that down payment!
Picking which one is right for you though can be the challenging part so let's break it down!
Cash Out Refinance: This is basically a whole new mortgage on your property for an amount that is higher than what you currently owe allowing you to pull equity out of the property. Banks have a certain threshold of what they will let you borrow factored by your LTV (Loan to Value Ratio) so be sure to ask what ratio they use when shopping around to be sure you'll get the amount you are looking for.
· Pros: The process is similar to how you got your first mortgage so as long as you have a similar credit score and DTI, you should be able to get approved easily. Also, there is still a chance to get your interest rate lowered in this scenario (maybe not for long though.) You can use this strategy on both owner occupied and investment properties.
· Cons: Your mortgage payments will now be higher. This difference in amounts is important to capture when analyzing new deals as this cost of borrowing money will impact the cash flow you will be receiving from a new property. Also, the length of the loan will now be longer and remember to factor in having to pay closing costs again on this new mortgage. This could be your biggest expense with this strategy.
HELOC: This is another loan on your property. Here, you can have your home equity function like a credit card. Once you get approved for a line of credit, you can pull out as little or as much cash as you need.
· Pros: Tends to be a rather simple approval process. Also, you only pay interest on the money you pull out, not the whole amount you were approved for. An added bonus is that at the start of the HELOC, you only need to make minimum or interest only payments. This is a great way to get a low cost loans in many situations with a good credit score and low DTI.
· Cons: Remember, HELOCs are generally variable rates so do make sure to ask questions about how your rate may change over time. Also, after the draw period is over at the start of your loan, you will have to make payments in full to cover the principal an d interest. Lastly, HELOCs are called Home Equity Lines of Credit as they are intended only for owner occupied properties. You can get a LOC (Line of Credit) on an investment property but the rates will most likely differ.
Learn more about these strategies on the Lady Landlords Podcast episode above!