1106: Cash out Refinances, HELOC, HEL, Personal Loan-Differences Between Them
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Welcome to episode 6 of season 11 of the Growing Empire Show. Today we're going to talk about home equity loans, home equity lines of credit, cash out refinances, and personal loans. I hope you stay tuned.
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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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So, cash out refinances, home equity lines of credit home equity loans and personal loans, what are they? What is the difference, and today that is what we're going to get into. Why you would use one over the other, and how to determine which one is best for you? So let's start out by talking about the differences between a cash out refi, a home equity loan, a home equity line of credit, and a personal loan. What are they? A home equity loan is a second mortgage. Usually has a fixed rate, it's a lump sum payment to you. And the rates and terms of your current mortgage stay the same because it's a second mortgage. So a home equity loan is a second mortgage on your property. A cash out refi is a new mortgage. Is a new mortgage that's going to replace your existing mortgage at a higher amount. And the equity or the difference between your first mortgage and your new mortgage is going to be cash that you can spend. A home equity line of credit otherwise known as a HELOC. That is another way to access your equity. And then rather than taking a lump sum, the HELOC allows you to use and pay off the money that you use just like a credit card. So a home equity line of credit versus a home equity loan. Home Equity Line of Credit is like a revolving amount of money. It's like a credit card, right? But it's usually a greater amount than a credit card would ever give you. That home equity line of credit is allowing you to take out money, pay it off, take out money paid off, take out money paid off, and it's revolving, essentially a revolving line of credit. That home equity loan is that second mortgage on your home, and it's a lump sum payment. So you take it out one time you use it, and then you pay it back over whatever the terms are. So 10, 15 years, 20 years, 30 years, something like that. And a personal loan is usually not secured by any kind of real estate. Personal Loan is something that you can get to obviously buy real estate and different types of things like that. So what would make you use one or the other? And I think that that's really important. So cash out refinances. What they are, is they replace your current debt with new debt of a larger amount allowing you to spend the equity on the property. So what can that cash be used to do? So cash out refinances, people are commonly using them to consolidate debt. So let's say you have a bunch of high interest credit cards, and you want to consolidate that debt, pay it off and get it into a much more feasible amount to lower the amount of interest that you're paying, which is essentially money just right out of your pocket. You could use a cash out refinance to do just that. Consolidate debt. cash out refinances also are commonly done for people that are doing renovations. They could be renovations on your investment property they could be renovations on your personal home. But a lot of times people do cash out refinances to do renovations. And my favorite thing to do with it, is to buy more real estate. So I believe that it is a really smart move to take the cash out of any property that you own, take the equity out, by way of a cash out refinance and use that equity for future purchases. Future gains. Because the reality is, is that you're now putting your money to work for you. So if you are consolidating debt, sure, you are definitely cutting down on the large interest rates, you're paying less to the banks, it's helping you to, you know, get yourself in a much more financially stable position for sure. But you're not creating any more wealth by doing it. You can use the cash out refinance to do renovations on your home as we've talked about. But again, you're not creating more wealth by doing it. You maybe creating more value to the property that you're renovating, but you are not creating wealth with it. When you're taking out the equity in a property that you already own, the untapped equity, and you're using it to fuel purchase power for additional investment purchases. You are absolutely using that money to create more wealth. And then ideally, each of the properties that you are purchasing is also creating another abundance of equity, that you can then cash out refi and take to buy another property. That is a really common thing for people that are looking to scale their portfolio is, you know, they start out with their own money on their very first property. You know, maybe your first property is, you know, 25, $50,000 or something like that. So you spend $50,000 of your own money. And if you're lucky enough, from that moment on, you should be able to use other people's money to purchase your investment properties, whether it's you're using the equity in your property, whether you're bringing in a partner, whether you're using, you know, the cash value of your life insurance policies, whether you're using your self directed IRAs, but hopefully that very first purchase that you put that $50,000 down or that $25,000 down whatever it is that you used initially. Hopefully, that's the first and the last time that you ever have to do that. And cash out refinances are one of the easiest ways to make that become a reality.
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The episode will continue in just a moment.
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As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.
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The challenge between a cash out refi and just outright selling the building is that you cannot take 100% of the equity out as you would if you were selling the property. So if you sell a property 100% of the value of the property goes back to you. Unless you had debt on it, which of course you had to pay off in the term of the sale. But with a cash out refinance, the banks are not going to lend on 100% of the value of the property. So if your property is appraised at a million dollars, you're probably only going to get 700 to $800,000 out of that property, because you're only going to be allowed to take out anywhere from 70 to 80% at a max. I hear them ranging anywhere between 70% to 80% really commonly is 75%. So if you've got a million dollar property, and you can only take out 75% of that money, that's $750,000. So that means that you're leaving another 250,000 on the table. But the good news behind that is, it's not terribly bad, is it likely keeps you from going into foreclosure. You know, back in 2008, 2009, when everybody was losing their shirts in the recession. A lot of that was because people were able to get mortgages at that time that were no doc loans. Meaning that they didn't even have to prove that they could afford it. But they also were refinancing their properties to 100% of the value. So if you take out if you borrow 100% of the value today, and then tomorrow, your property's worth significantly less. You're you're upside down in your mortgage. And that is unfortunately what happened to millions of people, and why they lost their homes in the recession. The good news is today, although it's a little bit more of a detriment to investors today, banks are no longer going to allow you to take out 100% of the value. The good news being though that you're not going to over mortgage your property and likely less likely to ever have to be faced with foreclosure should the market drastically change. So if taking out 75 to 80% of the property is not going to the value of the property the equity in the property is not going to be good enough, you're going to want to consider selling that property instead where you can realize 100% of the value of the property. But not every property is a candidate for sale either just like not every property is a candidate for a cash out refinance. But in that cash out refinance, what you're doing is you're replacing your current debt with new debt of a larger amount and you're taking the difference to spend for whatever you choose to spend it for. The pros to this can be, you're going to possibly lower your interest rate, it's going to provide you with that much needed cash for your projects, you're going to have longer repayment terms 15 to 30 years is fairly common. And it allows you to buy more real estate. The cons are, the rates in the terms of the loan could be different. So anytime you're getting a new mortgage, you're subject to the new rates of the new environment. So if rates have gone up, and terms are less favorable, because the market has changed that much, since the first time you bought your property, it may be an indication that that's not the right move for you. Maybe you do want to do something like a home equity line of credit or a home equity loan or something of that nature. But the rates could be different. So make sure that you check with your lender, before getting yourself involved in any kind of cash out refi. You want to make sure that the rates and the terms are going to be more favorable than the previous terms were so that you're not losing money on the deal, you're going to also have to pay closing costs and fees. Now a lot of times this is wrapped into the mortgage. So it's not always cash out of pocket. But you pay closing costs and fees when you bought your property, and you're going to have to pay it again. So that is sometimes considered, you know, a con of doing the cash out refinance. I think it's all relative to most extent, but you have to decide if that makes sense for you. And like I said before, you're only gonna get 70 to 80% of the value of the property out. But if you're looking for all of that equity, selling could be a way to go.
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I hope you got a lot out of today's show. And until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com