What Is A Cash Out Refinance In Real Estate Investing?

Last Updated on: 30th January 2023, 11:35 am

Cash-out refinance is when you take your property to a bank and use it as collateral to get a refinance loan. This is done by turning your home’s equity (at least 20%) that you’ve been building up over the years into real cash to use however you see fit.

How much can you refinance your home for?

The bank will usually approve you for 80% refinance loan out of the total value of your home. However, if you still have a remaining balance on your mortgage, which I would assume you’d have, they will then deduct it from that 80% and what you’ll be left with is what we call the “cash out money” from the refinance loan.

For example, if you have a property valued at $500,000 and a mortgage balance of $300,000, you may be eligible for a cash-out refinance loan of up to $400,000 (80% of $500,000). This would give you a lump sum of $100,000 ($400,000 – $300,000).

Note that you have to have at least 20% equity on your property to be approved for a cash-out refinance loan.

Also, this isn’t always gonna be the case, it can be different depending on which states you live in and what bank you use.

Let’s get into some more questions…

How to know the actual value of your property when applying for a cash-out refinance loan?

The bank will hire a third-party appraiser to determine the market value of your property. And to ensure that your property gets the right appraisal value, it is important that you have a record of all the work that’s been done on the property that you can show to your appraiser. The record should include how much money you put into it, as well as what you think the property’s value is based on comparable sales in the market.

What can you do with the cash-out refinance money?

You can use a cash-out refinance money to pay off your debt or you can get an investor loan to buy a rental property and use that cash as a downpayment for it.

Amazing, right?  Turning your home’s equity into a real cash and leveraging it to start a real estate business.

But why is a cash-out refinance a good thing for real estate investors?

Well, there are many situations where a cash-out refinance is gonna make a lot of sense for you.

Let’s make a list of things to cover to justify this question.

Things you can use a cash-out refinance for:

1. Can give you access to more capital to put into rental properties.
2. Can be used to pay off your consumer debt, otherwise called debt consolidation.
3. Can be used to increase the value of your primary home through renovations.
4. To lower your interest rate.

Let’s elaborate on the last part…

How can a cash-out refinance loan lower your interest rate?

Cash out refinance can lower your mortgage interest if you do it at a  time when the market interest rate for mortgage loans has gone down.  This means that your old mortgage interest rate will be replaced with a new one that has lower rates. But this also means that you’ll be starting your mortgage payment timeline over again from the very beginning because you just turned your home’s built-up equity that you’ve been paying over the years into tangible real cash.

Is doing a cash out refinance a bad choice?

No, it’s not. This is because when you do a cash out refinance, you’re literally leveraging your home’s equity by turning it into an actual cash that you can use for whatever you want it to.  Also, you can potentially lower your interest rate, saving you more money over the years.

What’s the downside of cash out refinance?

Because a cash out refinance is a replacement loan for your old mortgage loan in exchange for possibly lower interest and a lump sum of cash, this means that instead of getting closer to actually paying off your mortgage loan in full, you just made its payment loan terms to start over.

But hey, you got big cash now and lower interest. Maybe use that to put a down on a rental property? Wouldn’t that be nice?

Can you refinance a rental property?

The short answer is: Yes. As long as you have sufficient equity required, good credit score and qualifying DSCR (Debt Service Coverage Ratio).

What is a DSCR (Debt Service Coverage Ratio)?

DSCR is the amount of income or cash flow that the property brings in through rent that covers the debt. Basically how it works is the bank will look at your property’s DSRC to see whether or not it’s enough to cover the debt. Your property’s DSCR will determine the maximum possible loan amount you can get.

Now that you know the basic knowledge of how cash-out refinance works, let’s dive deep and answer some technical questions.

What fees and payments do banks charge for a cash-out refinance loan?

1. Closing Cost: Cash out refinance loan typically charges around 2 to 3 percent closing cost. This depends, some banks may even charge you 5 percent.
2. Interest Rate: Cash-out refinance interest rate can range somewhere from 4 to 5 percent. Note that investment properties may have higher interest rates compared to primary residences.

If you were wondering why you need to pay a closing cost that much or where it goes.

Well.. here’s your answer.

Where do cash-out refinance closing costs go?

Cash-out refinance closing cost goes to:

1. Title Insurance
2. Processing Fee
3. Appraiser Fee
4. Escrow Setup

To maximize the amount of value written in this post, we’ll make a list of thoughts and frequently asked questions to make this as simple as it can be.

Closing thoughts and FAQs

Reasons why cash-out refinance is good:

• Cash-out refinancing is good for holding your properties long-term.
• Most cash-out refinance loans are 30-year fixed-rate loans.
• Do a cash-out refinance to save and lower the interest. Doing so will make their mortgage payment less and they would be able to save money along the way.
• Make sure that you use that money in a financially beneficial way to improve your finances. Don’t spend it on luxury cars, clothes, bags, or anything that appreciates in value over time. Instead, put it back into assets that can make more money for you.

What if you don’t have out-of-pocket money to pay for cash-out refinance closing costs?

Cash-out refinance closing costs can be bundled into the total loan amount if you don’t have out-of-pocket money to pay for it.

Do you have to refinance to your current lender?

No. You don’t always have to refinance to your current lender. It’s okay to go to a different lender.

When is the best time to do a cash-out refinance?

Refinance when the interest rate is lower than the previous one.

Can you do a cash-out refinance to fund a small project?

You can. But it’s not a good idea to do a cash-out refinance if you know that the project that you would be needing funds for is only a fraction of the total loan amount. Make sure that you have valid reasons for taking out a cash-out refinance loan that way it’s not gonna be a waste and you know exactly where to put it and what to do with it.