Your duplex has appreciated $120,000 since you bought it, and tenants have paid down the balance. That equity is dead money until you put it to work — and the two standard tools for unlocking it are the cash-out refinance and the Home Equity Line of Credit (HELOC). They solve different problems, and choosing the wrong one is expensive.
Cash-Out Refinance: Replace the Whole Loan
A cash-out refi replaces your existing mortgage with a larger one and hands you the difference in cash.
Example:
- Current balance: $210,000 | Property value: $400,000
- New loan at 75% LTV: $300,000
- Cash out: ~$90,000 (minus closing costs of 2-3%)
Characteristics:
- One fixed-rate loan, fully amortizing (typically 30 years)
- Closing costs of 2-3% of the new loan
- Rate is usually between your old rate and current market rates — if your existing rate is below market, you are re-pricing your entire balance upward to get the cash
- Investment property cash-out LTV caps are typically 70-75%
HELOC: A Second Lien Behind Your Mortgage
A HELOC is a revolving credit line secured by your equity, sitting behind your existing first mortgage.
Characteristics:
- Draw period (typically 10 years) followed by repayment period (10-20 years)
- Variable rate, usually prime + a margin
- Interest-only payments during the draw period
- Low closing costs (often $0-$1,000)
- Investment property HELOCs are harder to find than primary-residence ones — credit unions and portfolio banks are the best sources
- Typical investment-property line: 65-75% combined LTV
Head-to-Head
| Feature | Cash-Out Refi | HELOC |
|---|---|---|
| Rate type | Fixed | Variable |
| Rate level | Market mortgage rate | Prime + margin (usually higher) |
| Closing costs | 2-3% | $0-$1,000 |
| Affects existing mortgage | Yes — replaces it | No — leaves it untouched |
| Payment structure | Full P&I | Interest-only in draw period |
| Best use | Large, permanent capital | Temporary/episodic needs |
| Speed | 3-5 weeks | 2-4 weeks |
The Rate Trap: Why Your Old Rate Matters
If you hold a 4.2% mortgage from 2021 and current rates are 7%, a cash-out refi re-prices all $210,000 at 7% to extract $90,000. The blended cost is brutal. In that scenario, a HELOC at 8.5% on only the $90,000 you need is usually cheaper overall — you keep the 4.2% first mortgage intact.
Conversely, if your existing rate is at or above market anyway, the cash-out refi's lower fixed rate and single payment usually wins.
Tax Treatment: The Interest Question
- Interest on a cash-out refinance of a rental is generally deductible as rental interest — if the proceeds are used in the rental activity (roof, down payment on the next property, etc.).
- HELOC interest follows the same use-of-proceeds logic: spent on the rental, generally deductible; spent on a boat, not.
- Document the use of proceeds. Deposit refi cash into the property's business account and trace every expenditure. Your CPA will thank you. (See our Schedule E deductions guide.)
Strategic Uses for Small Multifamily Owners
- The BRRRR-style recycle: buy, renovate, force rents up, refinance at the new value, recover your down payment, repeat — the cash-out refi is the engine of this strategy.
- Down payment for property #2: a HELOC on duplex #1 funds 20% down on duplex #2 without touching reserves.
- CapEx smoothing: a new boiler plus roof ($25,000) funded by a HELOC keeps your cash reserves intact for emergencies.
- Rate-and-term alternative: if you do not need cash, a plain rate-and-term refinance avoids the LTV caps and pricing hits of cash-out programs (see our refinance strategy guide).
Underwrite the New Payment
Whatever you extract, the new debt service must fit the property's income. Run the post-refinance PITIA through the DSCR Loan Calculator — if the ratio drops below 1.25, you are consuming cash flow that future you will miss.