If you’re a real estate investor sitting on equity, the real question isn’t whether to use it—but how. Two popular ways include home equity lines of credit (HELOCs) and cash-out refinances. Read on to learn the differences between the two and which is better for investors.
At ABL, we’ve been helping real estate investors maximize their returns with cash-out refinances for over 15 years. Whether you want to fund the acquisition of a new property or the renovation of an old one, our quick cash-out refinance loans can do the job.
What Is a HELOC?
A home equity line of credit (HELOC) is a revolving credit line secured by equity in your home. They work like a credit card: You can borrow, repay, and borrow again within a defined credit limit. However, HELOCs have variable interest rates and are designed for homeowners to cover personal expenses, not real estate investing projects.
What Is a Cash-Out Refinance?
A cash-out refinance is a loan that replaces a smaller existing mortgage, allowing you to keep the difference as cash. It typically has a fixed loan term and interest rate, making it more predictable for short-term investments like property purchases and rehabs. Furthermore, private lenders like ABL often offer them with flexible terms and fast closings.
Key Differences Between HELOCs and Cash-Out Refinances
The main difference between a HELOC and a cash-out refinance is structural: A HELOC adds a second loan on top of an existing mortgage, while a cash-out refinance replaces an existing mortgage with a new, larger one that becomes the primary loan.
Here’s a breakdown of other important differences between HELOCs and cash-out refinances:
| HELOC | Cash-Out Refinance | |
| Loan Structure | Revolving line of credit (borrow, repay, borrow again) | Replaces existing mortgage with a new, larger loan |
| Disbursement | Withdraw funds as needed, up to a set limit | Lump sum of cash at closing |
| Interest Rates | Variable (can rise with market fluctuations) | Fixed |
| Repayment | Interest-only payments during draw period, principal and interest payments during repayment period | Start paying down the loan immediately with principal and interest payments |
| Loan Term | Typically a 10-year draw period followed by a 10- or 20-year repayment period | Varies. ABL cash-out refinances offer loan terms of 12-24 months |
| Approval Process | Slow and requires strong credit and income | Asset-based options available for faster underwriting and closing |
| Use Case | Personal homeowner expenses like minor renovations and bills | Real estate acquisitions and major renovations |
| Risk | Interest rate can rise, and banks can freeze/reduce HELOCs in downturns | More stable. Interest rate and loan terms are locked in at closing |
Pros and Cons of HELOCs
Here are the pros and cons of getting a HELOC:
Pros
- Flexible draws. HELOCs let you draw loan funds as needed.
- Interest-only payments. You only pay interest on the amount you use.
Cons
- Variable interest rate. The interest rate on your HELOC could rise, resulting in higher and unpredictable borrowing costs.
- Can be frozen or reduced. Banks can suspend or reduce your HELOC under certain circumstances, such as a significant market downturn.
- Strict loan requirements. Most HELOC lenders require strong personal credit and income.
- Slow approval. Underwriting and loan approval tend to take weeks or longer.
- Smaller loan amounts. Since HELOCs sit behind existing mortgages, the amount of equity you can access is relatively limited.
Pros and Cons of Cash-Out Refinances
Here are the pros and cons of getting a cash-out refinance:
Pros
- Lump sum. A large one-time loan payment is ideal for purchasing additional property, funding major renovations, and scaling your portfolio.
- Fixed interest rate. A fixed interest rate ensures predictable payments and loan costs.
- Larger loan amounts. Since the cash-out refinance replaces an existing mortgage, you can often pull out a relatively large amount of equity.
- Fast underwriting. Asset-based lenders like ABL focus on the property’s value over your personal credit and income to streamline underwriting.
- Flexible loan terms. Cash-out refinance loan terms can be tailored to your unique project and circumstances.
Cons
- Equity requirement. For a cash-out refinance to make sense, it often requires having a significant amount of equity.
- Closing costs. Depending on the lender, the closing costs could be significant. However, ABL offers cash-out refinances with 0-2% in origination fees (points).
Which Is Better for Real Estate Investors?
Now that you know the difference between a HELOC and a cash-out refinance, let’s answer the obvious question: Which is better for real estate investors?
The answer is cash-out refinances. Here’s why:
- You get a lump sum to fund your next investment instead of smaller HELOC draws that may not be enough for a property purchase or major renovation.
- The interest rate is fixed, allowing you to better budget for investment costs and estimate final returns.
- Cash-out refinances tend to close in days instead of weeks, giving you quick access to capital so you can seize opportunities fast.
How to Maximize Your Return on Equity with a Cash-Out Refinance
Leaving large amounts of equity untouched is like leaving money on the table.
For example, instead of letting $200,000 in equity sit in a $300,000 property, you could refinance for $100,000 and pull out the remaining $100,000 in equity to put toward another investment. That way, your equity can start generating cash flow.
To maximize your return on equity, consult a lender to see how much equity you can pull out. Then explore high-return projects like rental acquisitions or value-add renovations. Finally, plan an exit strategy for repaying the loan. Contact an ABL cash-out refinance expert to learn more.
Take the Next Step: Get a Cash-Out Refinance From ABL
Ultimately, cash-out refinances outshine HELOCs for investors wanting to grow their portfolio and boost their returns. They provide fast access to larger sums of money, predictable payments, and flexible investor-friendly terms.
Tap into your equity and start maximizing your returns today by pre-qualifying for a cash-out refinance from ABL. Pre-approvals take under 24 hours, and loans close in as few as 10 days.