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Cash Out Refinance VS HELOC: Which is BETTER for Real Estate Investing? - YouTube
Channel: The Kwak Brothers
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cashout refinancing versus a HELOC a
home equity line of credit which is
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better which one should you go with and
what are the pros and cons of each of
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the choices hey what's up everybody
that's the same kwok here one of the
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kwak brothers and welcome back to our
channel and today we're going to talk
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about the difference between a home
equity line of credit and getting a cash
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out refinance in the context of
investing in real estate so we're gonna
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talk about the differences where the
pros and cons which one should you get
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what are some of the things you should
be watching out for for either the
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options and of course before we get
started be sure to subscribe to our
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channel if you want to learn more about
real estate investing buying rental
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properties and creating more positive
cash flow so let's go and drop the
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difference between a cash out refinance
versus a home equity line of credit both
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cash out refinance and a home equity
line of credit both involve in taking
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the equity out from a real estate and
turning them into a reusable cash so
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let's go and first talk about the cash
out refinance and typically when it's
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used in the context of real estate
investing now when it comes to a cash
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out refinance let's for example say that
you own hundred percent of the equity on
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this property meaning you have no debt
your mortgage has been paid off or you
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may have bought the property using cash
so what you do with the cash out
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refinance is that typically you'll get a
mortgage on an existing property that
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you own most banks and credit unions
will lend you on an eighty percent loan
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to value of the property so if the
property is worth a hundred thousand
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dollars the lender is willing to give
you up to 80 thousand dollars in terms
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of cash out refinance and most cash out
refinance depending on the terms you go
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if it can be either fifteen year
amortization or 30-year amortization on
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a fixed-rate interest now when getting a
cash out refinance the bank will
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typically require an appraisal done on
the property to see how much the
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property is actually worth based on coms
features of the property square footage
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bedroom and bathroom counts as well as
other miscellaneous features that may
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affect the value of the property
from there the bank will determine the
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interest rate based on your FICO score
as well as assess the closing cost so
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the typical closing cost of your pay
will be title fee's as well as if the
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underwriting fee and some of the other
administrative fees that you may pay
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while going through the cash out
refinance once all the loan docs are
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closed you typically get a check from
the bank and that will be deposited
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against your checking account and you
can pretty much use the money to do
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whatever you want
generally obviously in the
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context of real estate investing you expect me to
use that money to then go and buy other
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real estate properties to go and fix
them flip or to buy your next rental
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properties but then again you can go and
use that money to go and smash the like
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button for a YouTube algorithm and of
course we get the credit side now you
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have a new installment loan that's
reporting on your credit report on a 30
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or 15 year a amortization and of course
that's going to have an impact on your
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credit a new inquiry has been created
the overall age of your credit went down
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and you have a new account that's been
set up and it's being reported to your
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credit report now with the cash out
refinance it typically preached and
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promoted by users of the bird strategy
which stands for vine rehab
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rent refinance and repeat so each time
you do a cash out refinance you have to
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go to the application process you have
to get your credit check as well as
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appraisal on your property which in just
few minutes I'll talk about the pros and
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cons of the cash out refinance okay so
let's come across on the HELOC side and
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why it's a little different than the
cash out refinance now with the home
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equity line of credit keep in mind it's
a revolving line and credit meaning that
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you can pay back reuse pay back reuse so
think of it like a credit card that's
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attached to the home equity and also
with the HELOC there are two typical
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versions with the home equity line of
credit there's the second lien position
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side as well as the first lien position
side the more common version of the home
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equity line of credit is a second lien
position he'll off in which typically
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you have an existing mortgage and you
get a HELOC on top of that of whichever
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equity or however much equity you have
remaining on the property and then
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there's the first a HELOC which will
replace your mortgage and be the only
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debt on your property so instead of
having a mortgage think of it having a
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mega HELOC on your property and it's the
only debt that you'll have on the
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property now with the process of getting
a HELOC it varies depending on which
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version of the HELOC you get the first
name version versus second lien version
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now the typical process and again this
depends on what you get and what banks
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you go to it's very similar to the cash
out refinance but I'll point out some of
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the things that may be different as you
go and apply for a home equity line of
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credit first the bank may require a an
appraisal in which I've seen a lot of
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times he locks gets closed without doing
an actual impersonal appraisal sometimes
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the banks are opting in to what's called
a desk appraisal which a banker or
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underwriter would then appraise the
property using a software some sorts
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system to determine the value of the
property and some banks depending on
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what lien you get a first name versus
secondly may charge your closing cost
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and sometimes there may be an
application fee and a lot of times these
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application fees are anywhere between
twenty five two hundred dollars for the
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applications but in most cases for a
second lien HELOC they won't charge you
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a closing cost
but I do see quota banks that charge a
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closing costs for a first lien HELOC
just like a cash out refinance from
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there just like a cash out refinance if
you're taking a home equity line of
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credit to replace your existing mortgage
what would typically happen is that the
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bank will pay off the existing mortgage
and you'll get a release of the mortgage
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but you have a new mortgage which is now
your first lien HELOC the bank that has
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your heel out will typically have you
set up a checking account which then you
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can draw the money out from the HELOC to
the checking account you can write
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checks now you can swipe your debit card
or you can use a credit card then and
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then pay off the credit card using your
checking account that has a connection
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with the first lien HELOC and of course
assuming that you have a paid off
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property and you get a first thing HELOC
you pretty much have a checkbook to
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access your entire equity whenever you
want just like a credit card so again if
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your home values at $100,000 and the
bank gives you an 80% limit value first
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in HELOC it just means that you have
$80,000 limits that you can go and use
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whenever you need to but you don't have
to use the entire eighty thousand
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dollars typically I see people use
twenty thousand dollars of it for a
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rehab cost or they may use fifty
thousand dollars with to acquire new
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property so you can use it whenever you
want it's on demand and you only pay
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interest on what you actually use
instead of the entire limit unlike the
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cash out refinance so now that we drew
the difference between a cash out
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refinance versus a home equity line of
credit let's go and talk about the pros
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and cons and I think the obvious
difference from the get-go is the
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liquidity between the cash out refinance
versus a first lien HELOC whereas a cash
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out refinance once you use that money
and pay it off it's gone you have to go
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back and do another refinance and go
through another application process
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another appraisal another closing cost
so it's a whole entire process all over
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if you're looking to get that money back
into usage again however with the first
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thing he'll off once you have a line of
credit you have a funding that you can
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pay back reuse pay back and reuse over
and over again as long as you're within
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the draw period which is typically
between 10 to 15 years so you have 10 to
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15 years where you can pay it off reuse
pay it off and reuse and of course this
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is extremely helpful if you have a fix
and flip business whereas you need the
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money to acquire property and also money
to rehab the property put it on the
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market sell it pay off the heel off and
then have that funds to use again the
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next flip projects to move on
whereas with the cash out refinance
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every time you have a new project you
have to go through the whole process of
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applying and getting a new cash out
refinance going to the phrase Oh paint a
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closing cost all over again each time
you move on to the next project so with
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the heat lock it does give you more
flexibility it's more efficient and
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effective when it comes to the usability
as well as the liquidity and I know what
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you guys are thinking it's really hard
to get a home equity line of credit on
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investment properties or non owner
occupied properties well that's true but
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it depends on the banks and what the
underwriting criteria is like for that
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specific bank remember a home equity
line of credit
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unlike most cash out refinance programs
it's non qualifying mortgage meet which
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means that the banks have different
guidelines and different underwriting
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criterias and each bank may have
different guidelines and different
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programs that they follow with a home
equity line of credit so you may see one
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group of banks that don't lend a HELOC
on an investment property but you may
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see another group of banks that
absolutely do lend on helix for
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investment properties so it just depends
on which banks you go to that does he
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locks on investment properties so one
can say that that is a typical drawback
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when it comes to getting a first theme
he lock or a secondly he lock on an
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investment property whereas with a cash
out refinance the general guideline is
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pretty fluid and it's kind of expected
that you should go in cash out refinance
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and that's been the norm but because a
lot of things don't do a HELOC on
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investment property there's a little bit
of a perception amongst the investor
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community that getting a key lock on
investment property or non owner
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occupied property is rather difficult
but my answer to that is again it
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depends on the bank it depends on the
guidelines that the bank is using it
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also depends on what state you live in
because certain states have different
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laws and regulation as to how a lock can
be treated you can also use the first
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scene heal off to pay off your mortgage
even faster and I have a separate video
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that I made I'm going to put that in the
video description down below now in the
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context of real estate investing and as
a landlord myself I would choose the
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first scene heal off over the cash out
refinance mainly because I have the
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flexibility to reuse the
over and over again as long as I'm
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within the draw period think of it like
the cash out refinance to be a
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disposable battery whereas the first
thing he lock is like a rechargeable
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battery where if you are done using it
you can recharge it right and use it
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again recharge it resumed again you get
the point where as the cash out
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refinance you take it out once and once
you pay it off it's gone unless you go
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and get another cash out refinance and
you have to pay it off again and then
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repeat that cycle now just as a little
bit of a shameless plug my brother and I
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were able to buy 75 rental units without
using our own money or without even
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getting a cash out refinance or a HELOC
we were able to do so through raising
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money as well as negotiate for owner
financing so we actually just wrote a
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book called 0 to 75 units in just one
year where we're gonna show you how we
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would've by 75 rental units in just one
year without using our own money or
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credit we'll give you all the strategies
or detail the case study as well as some
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of the apartment buildings that we
bought using the strategies they're
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going to teach you right here in this
book and this book is free and all you
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have to do is cover shipping so if you
guys want this book for free go down
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below where I left it link 0 to 75 units
dot-com just paper shipping and we'll
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get it out to you as soon as possible
with that being said if you enjoyed this
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content be sure to subscribe to our
channel for more HELOC conversation as
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well as buying more rental properties
and investing in real estate and go and
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check out some of the other videos that
we have that you might be interested
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about this topic
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