What's the better choice?
At the end of the day, you'll borrow money with a cash out refi or HELOC that you'll need to pay back. So you may want to ask yourself which option will result in more favorable borrowing terms and a more doable monthly payment.
Why cash out refinancing makes sense
These days, mortgage refinance rates are sitting near record lows. If you're a strong enough borrower with solid credit, you might lock in a lower interest rate on a refi than with a HELOC, making that sum more affordable to pay off.
Also, cash out refinancing allows you to lock in a loan at a fixed interest rate. The interest rate you'll pay on a HELOC is commonly variable, which could impact your cash flow over time. And these days, you'll be looking at a higher interest rate on a HELOC than a cash out refinance.
Plus, with a cash out refinance, you'll have a single home loan to pay off. You won't juggle multiple payments as you would with an original mortgage plus a HELOC.
Why HELOCs make sense
On the other hand, HELOCs are more flexible. You don't have to commit to a specific sum to borrow. Instead, you can apply for a larger line of credit than you need initially and give yourself more flexibility down the line.
Say you own multiple income properties. You may be looking to renovate just one of those properties today, but what if you decide to take on a separate renovation at a different location you own in three years? Having a HELOC could mean not having to apply for another loan at the time, assuming you haven't tapped that entire credit line by then.
Also, there are closing costs whether you borrow money via a cash out refi or a HELOC. But with a HELOC, you're not refinancing an entire mortgage, so those fees may be a lot lower.
Real estate investors commonly enjoy different tax breaks, and both a cash out refinance and a HELOC could help you benefit in this regard. Both loan types, however, follow the same rules.
If you take out a HELOC and use the funds you receive for capital improvements to a property you own, you'll generally get to deduct the interest on the sum you borrow. Cash out refinances work similarly in that you'll get to deduct the interest on the excess cash you borrow if it's being used to make improvements to a given property.
The Millionacres bottom line
Having equity in a property you own gives you extra flexibility as an investor. Whether you opt to do a cash out refinance or take out a home equity line of credit, it pays to shop around for offers before moving forward. The lower the cash out refinance mortgage rate or HELOC rate you lock in, the easier it'll be for you to manage your loan. Talk to your lender to get more information.