Cashout Refi vs Home Equity Loan

[Gabriel Garces]

Hello BP,

I am a beginner investor and I need advice on getting money out of my investment property. 

I am fortunate that my father gifted me a single family house that I currently rent out. This house is currently worth around $150,000. I wish to take out a $100,000 loan against this property and use that money as a down payment for three other houses. 

Now I spoke to a lender and he said he is willing to do a Cash-out Refinance for a fixed rate of 4.5 % for 30 years. However, I have had other people including my father and other bankers tell me that a Home Equity Loan would be better? I was wondering if someone could tell me the big difference the two and what would actually be more beneficial for me. Is it true that with a cash-out refinance that the rate stays locked for full term, while a home equity loan does not? And l I plan to hold on to these properties for at least 10 years or longer, seeing how I am only 23. Also besides a change in rate, would anything change if I decided to live in the house? Thanks in advance.

[Gabriel Garces]

Hello Everyone, 

First off I want to thank everyone who posted on this forum. But now, after a week of speaking to different lenders, hearing different people in person and on BP, bankrate.com, and Brandon Turner, I will post everything I have learned.

The next matter of business to clarify that there is difference between a Home Equity LOAN and a Home Equity Line of Credit. It seems people like to use the two terms interchangeably. However, one is a lump sum loan and the other is.....a line of credit. It seems everyone knows what a line of credit is and its terms. So I am not going to talk more about it, as I am not trying to get a line of credit. Instead, I want to borrow a large amount of money, using the equity or value of my house. 

So now this brings us to the actual question: Cash-out Refinance or Home Equity Loan. To better understand the difference between the two, let's pretend I have a $50k mortgage on my $150k house. So now I want to take out $50k from the equity left in my house. 

The first option is the cash-out refinance which will readjust the terms, rate, or length of my existing mortgage and give me the extra 50k in my pocket. My new mortgage is now 100k.

The 2nd option is the home equity loan. I want to say this is simply a 2nd mortgage (maybe that's why people equate the term "home equity loan" with a HELOC). So with this home equity loan or 2nd mortgage I keep my original mortgage and add a 2nd one for 50k. Now I am paying two different mortgages and I got the extra 50k in my pocket.

A Cash-out Refi has more origination fees and is more of a hassle due to it taking longer and always needing an appraisal. But this is a tradition fixed rate loan that can last for 30 years. 

A home equity loan is cheaper to close and faster to get, but they have a shorter term. I'm not sure if the rate is cheaper, but the fact that the term is shorter, means the monthly payments are more likely greater than a refinance. 

So since I don't have an original mortgage, a cash-refinance and home equity loan accomplish the same thing. However, I am looking for the cheapest monthly payments possible. Thus, the cash-refi will save me more money each month, despite its expensive closing costs (which is coming out of the loan and not my pocket).

So there you go guys I am going to do a cash-out refi to use as a down payment on other properties, without using any cash in my pocket. Hopes this helps other investors and thank you BP.

BONUS: For those with a mortgage and you are towards the end of you term, it is generally better to get a home equity loan or 2nd mortgage. This is because your original mortgage payments are now paying back mostly principle, thus you would not want to restructure it. Overall it still comes down to what saves you the most money and your goals.