A cash-out refinance may be the more practical option when you need a large amount of investment-property equity at one time and want a single mortgage payment. A HELOC may fit better when you want to preserve the existing first mortgage and borrow only as expenses arise.
The tradeoff is flexibility versus certainty. Cash-out refinances commonly provide a fixed-rate, fully amortizing loan but replace your current mortgage. HELOCs generally have variable rates and changing payments, and fewer lenders offer them on rental properties.
The better option depends on how much equity you can access, your existing mortgage rate, the timing of the expense, closing costs, cash flow and your tolerance for variable payments.
Cash-Out Refinance vs. HELOC on an Investment Property Basics
| Feature |
Cash-Out Refinance |
HELOC |
| Loan Structure |
Replaces the existing mortgage with a larger first mortgage |
Generally adds a revolving second mortgage behind the existing first mortgage |
| How You Receive Funds |
One lump sum at closing |
Draws as needed during the available draw period |
| Interest Rate |
Commonly fixed, although product terms vary |
Usually variable, although some plans offer fixed-rate conversion features |
| Interest Charged |
Charged on the entire new loan balance |
Generally charged only on the amount drawn |
| Closing Costs |
Generally based on the full replacement mortgage |
May be lower, but fees, annual charges or early-closure fees can apply |
| Payment Structure |
Usually one fully amortizing mortgage payment |
Payment can change with the balance, rate and repayment phase |
| Rental-Property Availability |
Available through conventional and private investment-property programs |
More limited and lender-specific |
| Potential Use |
A large renovation, acquisition or one-time capital need |
Phased renovations, repairs or a reusable liquidity reserve |
How a Cash-Out Refinance Works on an Investment Property
A cash-out refinance pays off the existing mortgage and replaces it with a larger loan. You receive the difference between the new mortgage and the old payoff after closing costs and other required amounts are deducted.
For example, assume a rental property is worth $400,000 and the lender permits a new mortgage equal to 75% of its value.
| Calculation |
Amount |
| Property Value |
$400,000 |
| Maximum New Loan at 75% LTV |
$300,000 |
| Existing Mortgage Payoff |
$220,000 |
| Potential Cash Before Closing Costs |
$80,000 |
The $80,000 is an estimate rather than the amount the borrower would necessarily receive. Closing costs, prepaid expenses, liens and other required payments reduce the net proceeds.
You can estimate the result using a cash-out refinance calculator.
Investment-Property Cash-Out LTV Limits
Investment-property cash-out refinances generally have lower maximum loan-to-value ratios than comparable primary-residence refinances.
Under the current Fannie Mae Eligibility Matrix, standard maximums for eligible cash-out refinances generally include:
| Investment Property |
Maximum Standard Cash-Out LTV |
| One Unit |
75% |
| Two to Four Units |
70% |
These figures are agency maximums rather than guaranteed lender limits. Credit, debt-to-income ratio, reserves, property type, appraisal results and lender overlays can reduce the amount available.
Private and non-QM programs may use different limits.
How a HELOC Works on an Investment Property
A home equity line of credit, or HELOC, is a revolving line secured by the property’s equity.
During the draw period, you can generally borrow, repay and borrow again up to the approved limit. Interest is ordinarily charged on the outstanding balance rather than the full credit line.
A HELOC typically sits behind the first mortgage as a second lien. You continue making the original mortgage payment and add a separate HELOC payment.
Most HELOCs have variable rates tied to an index plus a lender margin. As the rate or outstanding balance changes, the required payment can also change.
After the draw period ends, the line enters repayment. You can no longer make additional draws, and the required payment can rise because principal repayment is added or accelerated.
See how a HELOC works for a detailed review of draw and repayment periods.
Are HELOCs Available on Rental Properties?
Some lenders offer HELOCs on investment properties, but availability is more limited than it is for owner-occupied homes.
A rental-property HELOC may have:
- A lower maximum combined loan-to-value ratio
- A higher minimum credit score
- More extensive reserve requirements
- Higher rates or fees
- Restrictions on the number of financed properties
- Limits on eligible property types or ownership structures
There is no universal investment-property HELOC limit. Each lender sets its own product requirements.
The lender calculates combined loan-to-value ratio, or CLTV, by adding the first-mortgage balance and the maximum HELOC amount, then dividing the total by the property value.
Use a CLTV calculator to estimate how an existing mortgage and proposed credit line compare with the property’s value.
Cash-Out Refinance vs. HELOC Costs
Cash-Out Refinance Costs
A cash-out refinance creates a new first mortgage, so closing costs can include:
- Lender origination charges
- Appraisal or valuation costs
- Title and settlement charges
- Recording fees
- Credit and verification fees
- Prepaid interest
- Escrow funding, when required
The costs apply to the full new mortgage rather than only the cash received.
Replacing a low-rate first mortgage can also create a substantial long-term cost if the new rate is higher.
HELOC Costs
A HELOC may have lower upfront costs because it does not replace the first mortgage. Depending on the lender, costs can include:
- Application or origination fees
- Appraisal or valuation fees
- Title fees
- Annual fees
- Inactivity fees
- Early-closure or reimbursement charges
A lender advertising no closing costs may require repayment of waived costs if the line is closed within a specified period.
When a Cash-Out Refinance May Fit
A cash-out refinance may fit when:
- You need a large amount at one time
- You have a clearly defined renovation or acquisition budget
- You want one mortgage payment
- You prefer a fixed interest rate and predictable amortization
- Your existing first-mortgage rate is not substantially lower than current refinance terms
- You qualify for enough proceeds after the investment-property LTV limit is applied
The option may be less attractive when replacing the existing mortgage would sharply increase the rate on the entire balance.
When an Investment-Property HELOC May Fit
A HELOC may fit when:
- You want to preserve a low-rate first mortgage
- You need funds in stages rather than all at once
- You want to pay interest only on amounts drawn
- You expect to repay and reuse the line
- You can manage a variable rate and changing payment
- A lender offers an acceptable investment-property HELOC
The option may be less suitable when you need a guaranteed fixed payment or the lender can offer only a small credit line.
Comparing the Effect on Monthly Cash Flow
A cash-out refinance changes the payment on the entire first-mortgage balance. The result depends on the new loan amount, rate and term.
A HELOC preserves the first-mortgage payment but adds a second payment. The HELOC payment depends on:
- The amount drawn
- The interest rate
- Whether the plan allows interest-only payments during the draw period
- The remaining repayment term
- Whether additional draws are made
Model the property’s cash flow under a higher HELOC rate and the full repayment-period payment. A line that appears manageable during an interest-only draw period may become more expensive later.
Qualification and Documentation
Investment-property underwriting is generally more restrictive than primary-residence underwriting.
A lender may review:
- Credit history and credit scores
- Personal income or property cash flow
- Debt-to-income ratio
- Rental leases and market-rent estimates
- Mortgage-payment history
- Property taxes and insurance
- Cash reserves
- The number of financed properties
- Ownership through an individual or business entity
- Appraised property value
Conventional cash-out refinances generally qualify using the borrower’s income, debts and applicable rental-income rules. Some private programs instead focus more heavily on the property’s cash flow.
DSCR Cash-Out Refinance as a Third Option
A debt-service coverage ratio loan, or DSCR loan, generally qualifies an investment property by comparing its eligible rental income with its required debt payment.
A DSCR cash-out refinance may fit investors who:
- Have complex personal tax returns
- Own several financed properties
- Use business entities to hold rentals
- Have substantial property cash flow but limited conventional qualifying income
- Do not meet standard agency underwriting requirements
DSCR programs vary by lender. They may have different LTV limits, prepayment penalties, reserve requirements, rates and fees than conventional financing.
A DSCR loan is not automatically a better or easier option. Compare its full costs and restrictions with conventional cash-out financing and any available HELOC.
Can You Deduct the Interest?
The federal tax treatment of interest generally follows how the borrowed funds are used rather than only which property secures the debt.
Under the IRS interest-allocation rules, interest associated with proceeds used in a rental activity may be treated as rental or business interest. For an individually owned rental reported on Schedule E, deductible rental expenses are generally reported there.
For example, rental-related treatment may apply when proceeds are used to:
- Repair or improve the rental property
- Pay eligible rental operating expenses
- Acquire another rental property
- Fund another qualifying rental-business expenditure
Interest associated with money used for personal expenses generally cannot be deducted as a rental expense.
Interest deductions may also be affected by passive-activity rules, at-risk rules, business-interest limits, capitalization requirements and the taxpayer’s ownership structure.
Keep records showing when funds were drawn, where they were transferred and how they were spent. Consult a qualified tax professional before relying on a deduction.
Using Equity to Renovate a Rental
Both options can provide funds for repairs and renovations.
A HELOC may fit projects completed in phases because you can draw funds as invoices become due. A cash-out refinance may fit a project with a fixed budget and a large upfront contractor payment.
Before borrowing, compare the renovation cost with the expected effect on:
- Market rent
- Vacancy
- Property value
- Maintenance expenses
- Insurance and property taxes
- Monthly debt service
Renovations do not guarantee enough additional rent or value to cover the financing cost.
Using Equity for Another Investment-Property Down Payment
Investors may use cash-out or HELOC proceeds for a down payment on another property when the loan terms permit it.
The lender financing the new purchase must document the source of the funds and include the new cash-out or HELOC payment in the borrower’s qualification when required.
Using borrowed equity increases leverage across the portfolio. A vacancy, repair or decline in rent at one property can affect the ability to carry debt secured by another.
See the guide to investment-property loan options for a broader comparison of purchase financing.
Alternatives to a Rental-Property HELOC
Fixed-Rate Home Equity Loan
A home equity loan provides a lump sum through a separate second mortgage, commonly with a fixed rate and fixed repayment schedule.
It can preserve the existing first mortgage while providing more payment certainty than a variable-rate HELOC.
HELOC on a Primary Residence
Some investors borrow against their primary residence when a rental-property HELOC is unavailable.
This places the primary home at risk if the loan is not repaid. Tax treatment still depends on how the proceeds are used.
Business Line of Credit
A business line may provide revolving capital without placing another mortgage on the rental property.
Qualification, rates, personal guarantees and repayment terms vary substantially.
Sale or Partial Portfolio Restructuring
Selling a property can release equity without adding debt, although transaction costs and potential taxes reduce the proceeds.
How to Compare Offers
Compare each option using the same funding amount and expected repayment period.
Review:
- The maximum cash or credit line available
- The first-mortgage rate being replaced or preserved
- The cash-out refinance rate
- The HELOC index, margin and rate cap
- The monthly payment during each HELOC phase
- Closing costs and annual fees
- Early-closure or prepayment charges
- Required reserves
- Appraisal and documentation requirements
- The effect on property and portfolio cash flow
- The intended use of the proceeds
Do not compare only the rate on the amount being withdrawn. A cash-out refinance reprices the entire first-mortgage balance, while a HELOC adds a separate rate only to the amount borrowed.
The Bottom Line
A cash-out refinance may fit an investment-property owner who needs a large lump sum and wants a single, commonly fixed-rate mortgage payment.
A HELOC may fit phased or uncertain expenses when preserving the existing first mortgage is a priority. Availability is more limited on rental properties, and variable rates create payment risk.
Compare the amount available, effect on the first mortgage, closing costs, repayment structure and cash-flow impact. Investors who cannot qualify through conventional income documentation may also compare a DSCR cash-out refinance.
Frequently Asked Questions
Can You Get a Cash-Out Refinance on an Investment Property?
Yes. Conventional and private lenders offer cash-out refinances on eligible investment properties. LTV limits, reserves, credit and documentation requirements are generally more restrictive than they are for primary residences.
How Much Equity Can You Cash Out From a Rental Property?
Under current standard Fannie Mae requirements, an eligible one-unit investment-property cash-out refinance may have a maximum LTV of 75%. The standard maximum for a two- to four-unit investment property is 70%. Lenders may set lower limits.
Can You Get a HELOC on a Rental Property?
Some lenders offer investment-property HELOCs, but availability and terms vary. These lines may have lower CLTV limits, higher credit requirements and more extensive reserve requirements than owner-occupied HELOCs.
Which Has More Predictable Payments?
A fixed-rate cash-out refinance generally provides more payment certainty. Most HELOCs have variable rates, and payments can change with the outstanding balance, index and repayment phase.
Which Option Preserves the Existing Mortgage Rate?
A HELOC generally preserves the first mortgage because it adds a separate second lien. A cash-out refinance replaces the first mortgage and applies the new rate to the full replacement balance.
Is Cash-Out or HELOC Interest Tax-Deductible on a Rental?
Interest may be deductible as a rental expense when the borrowed funds are properly traced to eligible rental or business uses. Personal use of the proceeds generally does not create a rental-interest deduction. Other tax limitations can apply.
Can You Use Rental Equity to Buy Another Property?
Generally, cash-out or HELOC proceeds can be used toward another purchase when the loan terms permit it. The new lender must document the funds and may count the related payment in qualification.
Is a DSCR Loan Better Than a Cash-Out Refinance or HELOC?
A DSCR cash-out refinance may fit an investor who qualifies more effectively using property cash flow than personal income. Rates, fees, leverage limits and other restrictions vary, so it should be compared with conventional financing rather than treated as automatically better.
What Documents Are Needed?
Common documents include mortgage statements, property insurance, tax records, leases, bank statements, reserve documentation, income records and an appraisal or other approved valuation. Requirements depend on the product and lender.
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