HELOC vs Home Equity Loan vs Cash Out refinance

[Kevin Charles]

Hello BP, 

So I have a sfh rental property that I am expecting to pay off fully in a few months. My plan is to use the equity in the rental to purchase additional rental property. What is the best way to pull cash out to do this? I am a little confused about the differences between HELOC, Home Equity loans, and cash out refinance. I understand that HELOC differs from Home equity loans in that they have a variable interest rate versus fixed for home equity loans but how does a cash out refinance compare and which is the best option on a fully paid off property?

[Joshua Silver]

Cash out refinance means you are taking out one big loan and you get all your equity in one lump sum. Home equity loan means you are taking on a second mortgage that's only equal to whatever equity you have in the house. This doesn't really apply to you, because you are going to be fully paid off. But if you had a place that was worth $150K, for example, and the loan balance was $100K that means you have $50K in equity and could get a home equity loan for that $50K. For these first two you get them in a lump sum, but the minute you get them you start accumulating interest and owe on them in the first month.

HELOC means the same as a home equity loan, except it's revolving like a credit card and they don't just give you $50K - it's a $50K line of credit. The benefit is that you don't have to start paying on the full amount right away you just pay on what you're using. So, if you use $10K of the $50K then next month you only owe on the $10K. This is the better way to go, imo, but the rate is a little higher. So, if you know exactly where you're using the whole amount and want the lower rate, go with a cash out refi. If you don't know exactly where the money is going and want to be able to use it as you need it get a HELOC and pay the higher rate. Good luck!