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HELOC’s and Cash-out Refi’s compared side by side:
Investing in real estate involves a great deal of creativity. Some say it’s “simple, but not easy”. If it were easy, everyone would be doing it!
Keep in mind, we’re here to support you in finding creative solutions to growing your portfolio from abroad.
In this week’s Real Estate Fundamentals series we dive into the debate of using a home equity line of credit (HELOC) or a cash-out refinance to purchase your next investment property.
Most real estate investors aren’t sitting around on piles of cash to buy multiple properties and grow their portfolios.
If you do have piles of cash – awesome – let us know if you need help figuring where/when to buy! If you don’t… keep reading!
One of the most powerful tools in an investors toolbelt is ‘leverage.’ Today we’re focusing on how to leverage, or use, the equity in your personal residence.
Example scenario: You own your home and its value is $200,000. You owe $100,000 on your mortgage, meaning you have $100,000 of equity in your home.
Question: How can you access and leverage that $100,000 of equity in your home?
Answer: HELOC or Cash-out Refinance
Definitions:
· HELOC: A line of credit you take out against the value of your home. It’s sometimes referred to as a ‘second mortgage.’ It can be used like a personal line of credit, but typically with a higher spending limit than is possible with a credit card or personal loan.
· Cash-out Refi: A “cash out” refinance is not your “typical” refinance (the kind you take advantage of when interest rates drop below what you’re currently paying on your mortgage). With a cash out refinance, you refinance a new loan on your property for more than you currently owe. This leaves you with cash in hand to use for the down payment on another investment property.
HELOC Qualities
HELOC’s are an amazing source of funding for down payments on other properties, renovations to current properties, or even as a line of credit for capital expenditures or other property “emergencies” that occur in your portfolio.
The beauty of a HELOC is once they’ve been approved, they’re available. If you haven’t drawn on the line of credit, you don’t have anything to pay. You only pay when you need/want to use it.
This can be a great source of low-interest, readily available funding to have at your disposal when the next great deal comes along.
Cash-out Refi Qualities
Cash out refinances don’t offer quite the versatility and flexibility of having an open HELOC. Once you get the cash out of the property, your new mortgage payment is immediately in effect and due at the beginning of each month.
After the refinance, however, your payments may be lower if you’ve obtained a lower interest rate and that can be a great feature.
Also, you’ve now “freed” the equity that was locked in your property. You can use the lump sum of cash to buy another investment property.
Which is best?
It depends on your overall strategy!
Both of these financial vehicles can be incredibly effective ways to utilize equity to purchase additional properties.
When and how you choose to use them is a matter of examining your goals, your strategy, and your overall financial picture.
To see HELOC’s and Cash-out Refi’s compared side by side, see this chart.
If you’d like to learn more about how these tools can help you in your investing career, give us a call. We’d love to walk you through the possibilities.
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