HELOC vs. Cash-Out Refinance for Growing Your Portfolio - Episode 1032 - Morris Invest (2024)

FAQs

Is a cash-out refinance or HELOC better? ›

Since a cash-out refinance is considered a first mortgage, it comes with more attractive rates and less in-depth requirements for approval. HELOCs typically take the form of a second mortgage and are considered riskier. They have variable interest rates, which means you may pay more over the lifetime of the loan.

You can't take out a home equity loan or HELOC (second lien) if you already have a Texas cash-out loan in place.

With a HELOC, you'll have access to a revolving line of credit that can help you manage large expenses as they arise—and you'll only pay interest on what you borrow. Compared with a mortgage refinance, where you receive a large lump sum of cash, a home equity line of credit may have a lower cost of borrowing.

A home equity investment is a financial strategy that involves converting your existing home equity into cash. Unlike a home equity loan or cash-out refinance, a home equity investment is not considered debt and has no interest rate.

Cash-out refinance cons

You owe more: Because you're taking out a larger loan amount, your overall debt load increases. No matter how close you were to paying off your original mortgage, the cash-out raises your debt level.

If you know exactly how much you need to borrow, a home equity loan can be a better option than a HELOC. Home equity loans tend to have lower interest rates than HELOCS, and the rates are usually fixed for the life of your loan.

Yes, you can take equity out of your home without refinancing your current mortgage by using a home equity loan or a home equity line of credit (HELOC). Both options allow you to borrow against the equity in your home, but they work a bit differently.

When you secure a home equity loan or HELOC, a lien is placed on your house, giving the lender a legal claim to your property until the loan is repaid. This is a standard practice, ensuring that lenders can recover their funds if you default on the loan.

The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

The line-of-credit arrangement also means you'll only pay interest on the amount you borrow, at least initially. With a home equity loan, you'll be responsible for interest on the entire loan balance, even if you don't use all the funds.

What credit score is needed for a cash-out refinance? ›

Cash-out refinance

On a cash-out conventional refinance, you'll need a 640 credit score at minimum. To qualify with a 640, you will need a loan-to-value ratio of 75% or less, at least six months in cash reserves, and a debt-to-income ratio of 36% or lower.

Yes, typically an appraisal is required in order to obtain a HELOC, however it is often a less detailed appraisal than necessary for a primary mortgage. To assess the amount of loan a homeowner can be awarded, lenders will need an accurate account of the value and condition of the property.

Con: You'll likely pay much more than you get

If that same borrower had gotten a home equity loan for $50,000 at a 10% interest rate and paid it back in 10 years, they would have paid the lender $29,424 in interest payments.

Real estate: Using home equity to buy an investment property can be a great way to build wealth. By tapping into your home equity, you might be able to purchase additional real estate properties that generate rental income or appreciate over time.

Though taking out a home equity loan can cause your credit score to drop, the impact is usually fairly small, and you can improve your score over time by managing your credit responsibly.

However, you typically end up paying a higher interest rate for a home equity loan than for a cash-out refinance. “It has to be that way because the lender is taking more risk,” says Foguth. “The home equity loan takes a second position to your mortgage.

If you intend to use the cash over a period of time, a HELOC may be your best option. This option allows you to withdraw the cash as and when you need it or not use it at all. A HELOC is often used as a backup strategy for example if you lose your job. If you don't use the money, you don't pay interest.