Do you refinance or do a HELOC on your rentals?

[Jesse Chambers]

I have a rental I’ve owned since 2011, it’s appreciated significantly and I currently never plan to sell it, but I’d like to capitalize on the equity in the home without selling it, so I could possibly possible use those funds to purchase another rental. How do you go about that, or is that a bad idea?

[Andrew Postell]

@Jesse Chambers there's pros and cons to it all.  Here's some quick summations on the two options:

1. Cash Out Loan - fixed rate and rate is likely lower than a Line of Credit.  Forecastable cash flow.  Closing costs are higher.  And you are paying interest on that money immediately.  So if you don't use that money, and it's sitting in your bank account, you still have to make your mortgage payments.  So you're paying for it with the interest on the loan.
2. Line of Credit - Lower Costs. Use it when you need it. You are only paying interest when you use it. Since LOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate. Not every Line of Credit has that clause but many do.

Hope this helps.  Thanks!