HELOC vs. Cash-Out Refinance for Growing Your Real Estate Portfolio | Morris Invest

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How do you decide between the HELOC and the cash-out refinance? For years now, I’ve been a big proponent of using the home equity line of credit, or HELOC, to reach your financial goals. Heck, I even wrote a book about it. But let’s talk about the differences between these two strategies, and then I’m going to tell you why I’m such a big fan of the HELOC.

Let’s start with the Home Equity Line of Credit
A HELOC is a revolving line of credit, meaning it works similarly to a credit card. It uses a variable interest rate, which is unlike many other banking products. The terms of a HELOC are typically going to give you access to around 80% of your equity. Additionally, there is what’s called a “draw period” where you can access funds. During the draw period, typically you’re only going to be making payments on interest. Then once the determined draw period is over, the credit line goes into full repayment with monthly payments made on both the principal and interest.

Cash-Out Refinance
A cash-out refi is when an existing mortgage is refinanced. When you get a cash-out refinance, you’re essentially getting a brand new mortgage for a higher amount than the initial loan.. The original loan is then paid off, and the difference between the original loan amount and the new loan is what you keep in cash.

In today’s economy, the HELOC comes out on top as the best way to access your home equity. Here are a few reasons why, in my opinion, the HELOC is a better tool than the cash-out refinance.

Rates. Some people are hesitant about the variable rates that HELOCs offer. According to Bankrate, current rates are hovering around the 8% mark. However, it’s important to remember that this number is an average. Some lenders may allow you to lock in lower rates. You also may be able to find introductory rates.

Overall price. When you take out a HELOC, you can take out a loan amount of exactly what you need. A cash-out refinance, however, essentially buys you an entirely new mortgage at today’s rate. If your existing home loan is locked in at a decent rate, it likely would not make sense to entertain a cash-out refinance. A HELOC, though, is going to give you a second payment in addition to your mortgage. Unless you’re taking out a very sizeable loan, the numbers will probably favor the HELOC.

Repeatability. One of the major benefits to the HELOC is that it’s a revolving line of credit, similar to a credit card. If you’re intentional, you can get a lot of bang for your buck while using a HELOC to reach your goals. The HELOC is a great option for an investor who wants to rinse and repeat.

Shorter timeline. In comparison with a 30-year mortgage, a HELOC repayment period is usually in the 10-20 year range.

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DISCLAIMER: I am not a financial adviser. I only express my opinion based on my experience. Your experience may be different. These videos are for educational and inspirational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. There is no guarantee of gains or losses on investments.

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[PROTOANYTHING]

I pray that my first rental will be in a zone where the job market is decent so that I don't have to chase the rent payments

[jimmydarby]

Good morning and "Happy New Year". TY for the great info. I have a home. And yes I'm going to look in to this. Like to add to this house and rent it out in about 2 years. Lots of college students in this area. But maybe I can use it to invest in one of your properties. Again thanks for the info 👍🇺🇲👍