cashout refinancing versus a HELOC a home equity line of credit which is
better which one should you go with and what are the pros and cons of each of
the choices hey what's up everybody that's the same kwok here one of the
kwak brothers and welcome back to our channel and today we're going to talk
about the difference between a home equity line of credit and getting a cash
out refinance in the context of investing in real estate so we're gonna
talk about the differences where the pros and cons which one should you get
what are some of the things you should be watching out for for either the
options and of course before we get started be sure to subscribe to our
channel if you want to learn more about real estate investing buying rental
properties and creating more positive cash flow so let's go and drop the
difference between a cash out refinance versus a home equity line of credit both
cash out refinance and a home equity line of credit both involve in taking
the equity out from a real estate and turning them into a reusable cash so
let's go and first talk about the cash out refinance and typically when it's
used in the context of real estate investing now when it comes to a cash
out refinance let's for example say that you own hundred percent of the equity on
this property meaning you have no debt your mortgage has been paid off or you
may have bought the property using cash so what you do with the cash out
refinance is that typically you'll get a mortgage on an existing property that
you own most banks and credit unions will lend you on an eighty percent loan
to value of the property so if the property is worth a hundred thousand
dollars the lender is willing to give you up to 80 thousand dollars in terms
of cash out refinance and most cash out refinance depending on the terms you go
if it can be either fifteen year amortization or 30-year amortization on
a fixed-rate interest now when getting a cash out refinance the bank will
typically require an appraisal done on the property to see how much the
property is actually worth based on coms features of the property square footage
bedroom and bathroom counts as well as other miscellaneous features that may
affect the value of the property from there the bank will determine the
interest rate based on your FICO score as well as assess the closing cost so
the typical closing cost of your pay will be title fee's as well as if the
underwriting fee and some of the other administrative fees that you may pay
while going through the cash out refinance once all the loan docs are
closed you typically get a check from the bank and that will be deposited
against your checking account and you can pretty much use the money to do
whatever you want generally obviously in the
context of real estate investing you expect me to use that money to then go and buy other
real estate properties to go and fix them flip or to buy your next rental
properties but then again you can go and use that money to go and smash the like
button for a YouTube algorithm and of course we get the credit side now you
have a new installment loan that's reporting on your credit report on a 30
or 15 year a amortization and of course that's going to have an impact on your
credit a new inquiry has been created the overall age of your credit went down
and you have a new account that's been set up and it's being reported to your
credit report now with the cash out refinance it typically preached and
promoted by users of the bird strategy which stands for vine rehab
rent refinance and repeat so each time you do a cash out refinance you have to
go to the application process you have to get your credit check as well as
appraisal on your property which in just few minutes I'll talk about the pros and
cons of the cash out refinance okay so let's come across on the HELOC side and
why it's a little different than the cash out refinance now with the home
equity line of credit keep in mind it's a revolving line and credit meaning that
you can pay back reuse pay back reuse so think of it like a credit card that's
attached to the home equity and also with the HELOC there are two typical
versions with the home equity line of credit there's the second lien position
side as well as the first lien position side the more common version of the home
equity line of credit is a second lien position he'll off in which typically
you have an existing mortgage and you get a HELOC on top of that of whichever
equity or however much equity you have remaining on the property and then
there's the first a HELOC which will replace your mortgage and be the only
debt on your property so instead of having a mortgage think of it having a
mega HELOC on your property and it's the only debt that you'll have on the
property now with the process of getting a HELOC it varies depending on which
version of the HELOC you get the first name version versus second lien version
now the typical process and again this depends on what you get and what banks
you go to it's very similar to the cash out refinance but I'll point out some of
the things that may be different as you go and apply for a home equity line of
credit first the bank may require a an appraisal in which I've seen a lot of
times he locks gets closed without doing an actual impersonal appraisal sometimes
the banks are opting in to what's called a desk appraisal which a banker or
underwriter would then appraise the property using a software some sorts
system to determine the value of the property and some banks depending on
what lien you get a first name versus secondly may charge your closing cost
and sometimes there may be an application fee and a lot of times these
application fees are anywhere between twenty five two hundred dollars for the
applications but in most cases for a second lien HELOC they won't charge you
a closing cost but I do see quota banks that charge a
closing costs for a first lien HELOC just like a cash out refinance from
there just like a cash out refinance if you're taking a home equity line of
credit to replace your existing mortgage what would typically happen is that the
bank will pay off the existing mortgage and you'll get a release of the mortgage
but you have a new mortgage which is now your first lien HELOC the bank that has
your heel out will typically have you set up a checking account which then you
can draw the money out from the HELOC to the checking account you can write
checks now you can swipe your debit card or you can use a credit card then and
then pay off the credit card using your checking account that has a connection
with the first lien HELOC and of course assuming that you have a paid off
property and you get a first thing HELOC you pretty much have a checkbook to
access your entire equity whenever you want just like a credit card so again if
your home values at $100,000 and the bank gives you an 80% limit value first
in HELOC it just means that you have $80,000 limits that you can go and use
whenever you need to but you don't have to use the entire eighty thousand
dollars typically I see people use twenty thousand dollars of it for a
rehab cost or they may use fifty thousand dollars with to acquire new
property so you can use it whenever you want it's on demand and you only pay
interest on what you actually use instead of the entire limit unlike the
cash out refinance so now that we drew the difference between a cash out
refinance versus a home equity line of credit let's go and talk about the pros
and cons and I think the obvious difference from the get-go is the
liquidity between the cash out refinance versus a first lien HELOC whereas a cash
out refinance once you use that money and pay it off it's gone you have to go
back and do another refinance and go through another application process
another appraisal another closing cost so it's a whole entire process all over
if you're looking to get that money back into usage again however with the first
thing he'll off once you have a line of credit you have a funding that you can
pay back reuse pay back and reuse over and over again as long as you're within
the draw period which is typically between 10 to 15 years so you have 10 to
15 years where you can pay it off reuse pay it off and reuse and of course this
is extremely helpful if you have a fix and flip business whereas you need the
money to acquire property and also money to rehab the property put it on the
market sell it pay off the heel off and then have that funds to use again the
next flip projects to move on whereas with the cash out refinance
every time you have a new project you have to go through the whole process of
applying and getting a new cash out refinance going to the phrase Oh paint a
closing cost all over again each time you move on to the next project so with
the heat lock it does give you more flexibility it's more efficient and
effective when it comes to the usability as well as the liquidity and I know what
you guys are thinking it's really hard to get a home equity line of credit on
investment properties or non owner occupied properties well that's true but
it depends on the banks and what the underwriting criteria is like for that
specific bank remember a home equity line of credit
unlike most cash out refinance programs it's non qualifying mortgage meet which
means that the banks have different guidelines and different underwriting
criterias and each bank may have different guidelines and different
programs that they follow with a home equity line of credit so you may see one
group of banks that don't lend a HELOC on an investment property but you may
see another group of banks that absolutely do lend on helix for
investment properties so it just depends on which banks you go to that does he
locks on investment properties so one can say that that is a typical drawback
when it comes to getting a first theme he lock or a secondly he lock on an
investment property whereas with a cash out refinance the general guideline is
pretty fluid and it's kind of expected that you should go in cash out refinance
and that's been the norm but because a lot of things don't do a HELOC on
investment property there's a little bit of a perception amongst the investor
community that getting a key lock on investment property or non owner
occupied property is rather difficult but my answer to that is again it
depends on the bank it depends on the guidelines that the bank is using it
also depends on what state you live in because certain states have different
laws and regulation as to how a lock can be treated you can also use the first
scene heal off to pay off your mortgage even faster and I have a separate video
that I made I'm going to put that in the video description down below now in the
context of real estate investing and as a landlord myself I would choose the
first scene heal off over the cash out refinance mainly because I have the
flexibility to reuse the over and over again as long as I'm
within the draw period think of it like the cash out refinance to be a
disposable battery whereas the first thing he lock is like a rechargeable
battery where if you are done using it you can recharge it right and use it
again recharge it resumed again you get the point where as the cash out
refinance you take it out once and once you pay it off it's gone unless you go
and get another cash out refinance and you have to pay it off again and then
repeat that cycle now just as a little bit of a shameless plug my brother and I
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get it out to you as soon as possible with that being said if you enjoyed this
content be sure to subscribe to our channel for more HELOC conversation as
well as buying more rental properties and investing in real estate and go and
check out some of the other videos that we have that you might be interested
about this topic