Hey, Jordan. I am assuming that you've already found an answer to this elsewhere given the time past, but I stumbled across this while searching the forum for an answer to my own question on the topic and figure maybe a response will help someone in the future. All three of these tools are ways for you to pull equity out of your home that would otherwise be sitting idle; for an investor this would commonly be done so that they could reinvest that capital and earn compounding returns. In this way, you could purchase multiple properties with the same initial down payment by recouping the down payment amount when pulling out equity once the property has appreciated (through market increase, value-add, or you getting the deal under market value). As a precursor to addressing the three methods, I should say that I am not a lender nor an expert. I've been in construction for years and have been hitting real estate investing fairly hard for only about a year. I have in that time had many conversations with loan officers attempting to find creative ways to finance different real estate opportunities and have learned a lot (plus I stayed at a Holiday Inn Express last night...). That's all to say, if anyone wants to poke holes in my answer, be my guest.
A cash-out refi is the only method that begins and ends with you having one loan. You're taking out a new loan at current interest rates for the current value of the home, paying off the original loan with the new loan, and pocketing the remainder (equity) in cash to reinvest. This option works best when current interest rates are lower than on the original mortgage, though people on BP certainly have discussed doing cash-out refi's even when going into a higher interest rate because they have an opportunity to reinvest where they are confident they will make much higher returns on the equity pulled than the small amount they're losing in interest delta.
A home equity loan is a second mortgage at current interest rates, but only for the equity you have (up to ~75-80% LTV) as opposed to replacing your original mortgage. This relates to the question I have - why do I not hear more about people doing home equity loans (with BRRR's and otherwise) as interest rates rise as opposed to cash-out refi's?? It seems to me that it would be wise to keep the original (say 3%) mortgage and pull out only the equity at 5% instead of a whole new mortgage at 5%. I know that home equity loan rates are a little worse than a cash-out rate, but that would rarely make up the difference in refi-ing out of a great rate for an entire mortgage.
A HELOC is a way to pull out equity only that resembles a credit card using your home as collateral. This is a nice option when you don't know if/when you'll need the funds, as well as when you don't know exactly how much you'll need. You can apply for a HELOC and have the funds at your disposal but not pay until you pull equity out, as opposed to an equity loan where you pull out a fixed amount and start paying immediately, even if you haven't begun to use the funds. For example, I have a HELOC out right now because my wife and I are attending auctions and want to have the equity available in case we find the acreage we are looking for at the right price. The HELOC will buy us time to set up a loan in case the down payment is more that we want to pull from our savings. The risk is that these are often variable rates (mine is a fixed rate HELOC), but just set yourself up to pay off the HELOC quickly and you can mitigate the risk. An additional benefit is that the HELOC has much lower closing costs than the other two options (a few hundred $ as opposed to a few thousand). Hope this helps!
