Apollo AdvisingCash-out refinance or HELOC on a rental?
Cash-out refinance or HELOC on a rental property? How each one works on an investment property, what they cost, and the cash flow test to run before you borrow.
Short answer. A cash-out refinance replaces your whole mortgage with a bigger one, so it reprices your existing balance at today's rate. A HELOC leaves your current loan alone and adds a separate, usually variable-rate line. If your current rate is low, a HELOC or a smaller second loan is often cheaper per dollar of cash. Fewer lenders offer HELOCs on rentals, so compare what is actually available.
How each one works on a rental
| Cash-out refinance | HELOC on a rental | |
|---|---|---|
| What it does | Pays off your mortgage with a larger new one | Adds a credit line on top of your mortgage |
| Typical limit | Often around 70% to 75% of value for investment property | Often lower combined limits; fewer lenders offer it |
| Rate | Fixed or adjustable, on the whole balance | Usually variable, only on what you draw |
| Closing costs | Full mortgage closing costs | Usually lower |
| Best when | Your current rate is at or above today's rates, or you need a long fixed rate | Your current rate is low, or you need flexible access to cash |
The hidden cost of a cash-out refinance
Say the rental is worth $400,000 and you owe $150,000 at 3.5%. A cash-out refinance to 75% of value is a $300,000 loan, giving you about $150,000 before closing costs. At 7.25%, first-year interest is about $21,750, compared with about $5,250 on the old loan.
So the new $150,000 effectively costs $16,500 a year in added interest, about 11.0% on the cash you received, because the old balance was repriced too. A HELOC at 8.5% on a $130,000 line costs about $11,050 a year if fully drawn, and nothing on what you leave undrawn.
These are simplified, interest-only figures for comparison. Real costs depend on fees, terms, and how quickly you repay.
The test to run first
Before you borrow against a rental, answer three questions:
- Does the rental still cash-flow with the higher payment, after every cost and a reserve?
- Does the use of the money earn more, after tax and with honest risk, than the borrowing costs? Paying off higher-rate debt or funding a renovation that raises rent are different from speculating.
- If rates rise or the rental sits vacant, can you carry the payment from other income?
If you are pulling equity because the property's return on equity has fallen, also compare borrowing with selling or exchanging, since those are the other ways to put trapped equity to work.
A Texas note
Texas has special rules for home equity loans on a homestead, including limits on how much can be borrowed. Those rules protect primary residences, not rental properties, so rentals are generally financed under ordinary lending rules. Confirm with your lender.
Where we fit
We help you decide whether to pull equity at all and how it changes the property's cash flow and risk, then you take the specific options to a lender. Apollo Advising does not give lending advice. Denver McClure holds an ownership interest in Fiduciary Financing LLC, a loan advisory firm, and may be compensated if you use it; you are never obligated to. See refinance and equity decisions and our disclosures.
Want this run on your property?
$199 per hour, billed in 15-minute increments, or $499 for a three-hour block. The first 30 minutes are free.
Free worksheet: hold, sell, or 1031?
The 12 questions Denver works through with every owner deciding whether to keep, sell, or exchange a rental, in a two-page PDF. Plain language, no sales pitch.
Go deeper
Return on equity calculatorSee what the equity in your rental earns each year in cash flow.Return on equity: the rental number most owners never checkHow to calculate it, why it drifts down as a property appreciates, and what it does and does not tell you about selling.DSCR loans for rental property, explainedHow lenders calculate the ratio, what the loans usually cost, and when one fits.When a 1031 exchange does not make senseSix situations where paying the tax can beat deferring it, and how to run the comparison.This page is general education, not legal, tax, investment, insurance, or lending advice. See our disclosures.