A cash-out refinance occurs when investors take out a new loan on an existing property to extract equity from that property. Cash-out refinances happen when investors refinance for more than the current mortgage and receive the difference in cash. Cash-out refinances require at least 30 percent to 40 percent equity and have rates around 3.25 percent.
If you’re looking for a reputable lender that offers a cash-out refinance, check out Visio Lending. It offers competitive rates for prime borrowers and can typically fund the refinance in as little as three to four weeks. It only takes a few minutes to get prequalified online.
How a Cash-out Refinance Works
A cash-out refinance happens when investors refinance a home in order to extract equity from the property. They take out a new loan to pay off their existing mortgage and, if the new loan is larger than the previous loan, they can use the difference to use as a rehab budget or to invest in other properties. A cash-out refinance essentially lets you unlock the cash in an illiquid investment.
A cash-out refinance, also known as a “cash-out refi,” can finance up to 75 percent of a property’s current fair market value (FMV), known as the loan-to-value (LTV) ratio. This means you need at least 30 percent equity in a property for a cash-out refinance to make sense. For example, a house worth $150,000 can be refinanced with a loan up to $112,500, derived as:
($150,000 fair market value) x (0.75 LTV) = $112,500 maximum refinance amount
If your existing mortgage balance is at or higher than $112,500, then a cash-out refi would only make sense if you wanted to lock in a lower interest rate. Investors with existing mortgage balances below $112,500, however, can use the new loan to pay off the existing mortgage. For example, if your current loan’s principal balance is $100,000 and you refinance with a $112,500 loan, you would have $12,500 left over to invest elsewhere.
Therefore, the three important components of a cash-out refinance are:
- The existing mortgage balance
- The property’s fair market value
- The new loan amount
Typically, investors apply for a cash-out refi and, if accepted, the lender and the title company will handle paying off the existing loan via a wire transfer. The borrowers then receive their excess funds in “cash,” which is usually in the form of a wire to their bank or a certified check from the title company.
If you’re looking for a new lender to help you with your cash-out refinance, look no further than Visio Lending. It is an online lender that specializes in investment property loans, both short- and long-term. Prequalification takes minutes, so check the company out today.
The People a Cash-out Refinance is Right For
A cash-out refinance is typically used by investors who have at least 30 percent to 40 percent equity in an existing investment property. These investors use a cash-out refinance to extract their equity and purchase either a new investment property or renovate an existing investment property. The new loan amount must be higher the old mortgage balance and the difference is pocketed in cash.
Specifically, a cash-out refinance is right for three types of investors:
- Short-term fix-and-flippers looking to purchase, renovate, and flip a new investment property.
- Long-term buy-and-hold investors looking to put a down payment on a new property or purchase it with all cash.
- Long-term buy-and-hold investors looking to renovate an existing rental property.
There are no restrictions on how investors use the cash from a cash-out refinance, so that’s why it’s right for different investors. Therefore, the money earned on a cash-out refi can be used to renovate an existing long-term rental property in an attempt to increase its value and its rental income.
It can also be used to finance a short-term fix-and-flip project as well as a long-term rental property. The funds can also make it easier to compete with all-cash buyers for foreclosures or properties sold at real estate auctions. Regardless of intention, investors need an existing property in order to execute a cash-out refi.
If you’re looking for a cash-out refinance on one or multiple properties, then Visio Lending could be a good fit. It has portfolio loans that allow you to refinance on a single property or several properties. You can get up to $2 million with a 30-year term and competitive rates for prime borrowers.
Cash-out Refinance Rates, Terms & Qualifications
The new loan obtained in a cash-out refinance is typically similar to the old mortgage. The differences are that the new loan will usually have a lower interest rate and LTV ratio. You will still need to meet certain qualifications to qualify for the new loan, such as having a minimum 640 credit score.
Cash-out Refi Breakdown of Rates, Term & Qualifications
|Loan Amount||Up to 75% Loan-to-Value (LTV)|
|Interest Rate||3.25% - 5%|
|Fees||0% - 3% Lender Fees|
2% - 5% Closing Costs
|Loan Term||15 - 30 Years|
|Time to Funding||30 - 45 Days|
|Qualifications||640 Minimum Credit Score|
(Check your credit score for free here)
36% - 45% Debt-to-Income Ratio
0 - 6 Months Cash Reserves
Visio Lending is an online lender servicing real estate investors looking for a cash-out refinance. Prequalification only takes minutes, so check it out today for more information.
Cash-out Refinance Loan Amount
According to Fannie Mae, the maximum loan amount for a cash-out refinance is as follows:
- LTV: 75 percent for a one-unit property
- LTV: 70 percent for a two-to-four unit property
The maximum loan amount allowed on a cash-out refinance is regulated by Fannie Mae. Loan amounts are issued as a percentage of a property’s FMV, which is the LTV ratio. Furthermore, if a property was listed for sale during the last six months, Fannie Mae sets a maximum loan amount of 70 percent LTV, regardless of the number of units.
Cash-out Refinance Rates & Costs
Cash-out refinance rates & costs are typically:
- Rates: 3.25 percent to 5 percent
- Lender fees: 0 percent to 3 percent
- Closing costs: 2 percent to 5 percent
One of the benefits of a cash-out refinance is that the interest rates on the new loan are typically lower than the interest rates on the old mortgage. Interest rates can be either fixed or variable and are typically lower than the 4 percent to 6 percent rates found on a traditional mortgage or the ~5 percent found on a home equity loan or line of credit.
However, since cash-out refis are unique, the loan origination fees charged are typically higher than with a traditional mortgage. What’s more, unlike a home equity loan, cash-out refis require that the borrowers pay additional closing costs. These costs and fees are usually taken directly out of the new loan, reducing the lump sum amount received by the borrowers.
Cash-out Refinance Loan Term
Generally, cash-out refinance loan terms are:
- Term: 15 to 30 years
- Approval time: 30 to 45 days
- Funding: Within three days
This is important to note because a cash-out refinance will typically extend the loan term beyond the investors’ old mortgage. It’s common for investors with as little as eight to 10 years left on their existing mortgage to refinance to a 30-year loan.
Loans on a cash-out refinance generally take between 30 and 45 days for approval. Once approved, the cash is wired to the original lienholder to pay off the mortgage and the remainder is wired to the borrowers by a title or escrow company within three days. Sometimes, in lieu of a wire, the buyers will receive the funds in a certified check from the title company.
Cash-out Refinance Qualifications
The following minimum requirements for a cash-out refinance approval are:
- Credit score: 640-plus (check your credit score for free here)
- Debt-to-income ratio: 36 percent to 45 percent
- Cash reserves: 0 to 6 months
- Property status: Property can’t be listed for sale at the time of loan application
- Seasoning: Property must be owned for at least six months
- Equity: 30 percent to 40 percent in an existing property: owner-occupied primary residence or a non-owner-occupied investment property
- Cash reserves: More than six months
- Personal tax returns: Two years
- Debt service coverage ratio (DSCR): 1.25 DSCR shown by providing a current lease
The lower the credit score, the higher the required debt-to-income ratio and higher the required cash reserves. The opposite is also true. This is because cash-out refis for investment properties are risky for lenders. Generally, the loan obtained through a cash-out refinance cannot be more than 75 percent of the property’s FMV, so that’s why 30 percent to 40 percent equity is needed.
However, an investment property that was purchased in the last six months is eligible for a cash-out refi up to 70 percent LTV if it meets the delayed financing rule. The delayed financing rule requires that an investment property has:
- A loan amount that’s less than the original purchase price plus closing costs
- An “arms-length” transaction, meaning that there was no prior relationship between the buyers and sellers
- Final closing disclosure showing the financial details of the transaction
“It’s more difficult to get approved for a cash-out refi on an investment property than for borrowers looking to refinance their primary residence. This is because it’s more of a risk for a lender to lend money to an individual who is not occupying the property.”
— Randall Yates, President and CEO, The Lender’s Network
Where to Find a Cash-out Refinance
The first place to look for a cash-out refinance is with the lender you already have your original mortgage with. This is the most convenient option because the lender will already have all of your loan information.
However, if you would prefer to work with another lender or think you will find a better rate elsewhere, you can find cash-out refis at most banks, credit unions and online lenders. An online lender is usually nationwide, has a streamlined pre-approval process and generally offers competitive rates.
Our preferred investment property lender is Visio Lending. It is a reputable lender that offers cash-out refis with competitive rates to prime borrowers, has loans specifically for investors and can get you prequalified in just a few minutes.
How to Apply for a Cash-out Refinance
Most traditional mortgage lenders offer cash-out refinance options. Online mortgage lenders like Visio Lending are terrific options for investors looking for a cash-out refi with a reputable lender. Regardless of the lender, the application process for a cash-out refinance is fairly standardized.
Borrowers should expect to follow these five steps:
1. Determine Amount of Equity
The first step as investors is to determine the amount of equity you have in a potential cash-out refinance. You can do this by subtracting the remaining mortgage balance from the FMV of the property. Companies like Zillow have accurate and free information, and you can also pay for your own independent appraisal.
2. Identify Mortgage Lender
Once you’ve established that you have at least 30 percent to 40 percent of equity, the next step is to identify a Fannie Mae-approved mortgage lender to help you with your cash-out refi. Fannie Mae has a list of affordable lenders, and you can also engage a national lender like Visio Lending or something similar.
3. Apply for Prequalification
Regardless of the lender you choose, the application process for a cash-out refinance is typically the same. You’ll first apply for prequalification, where a lender will ask for basic information and give you a general loan estimate. This should give you a general understanding of how much equity you can extract from your property. Prequalification takes minutes and gives you a maximum loan amount possible.
4. Finalize Pre-approval
From there, lenders will conduct an appraisal and ask for more investor information, such as two recent pay stubs, a list of total assets and debts. Additionally, if it’s an investment property being refinanced, investors have to show six months cash of reserves, two years personal tax returns, and a current lease agreement. The information in this stage helps lenders determine the specific loan term, rates, and costs offered for the cash-out refi.
5. Receive Funding
The final step is to receive the loan that was finalized during pre-approval. This typically takes three days after the application is fully approved. During this time, the funds from the loan are wired directly to the borrowers’ bank account and the borrowers are responsible for paying off the old mortgage and using the remaining funds for other investments.
If you have single or multiple rental properties you want to get a cash-out refi for, check out Visio Lending. It offers competitive rates for prime borrowers and can get you prequalified in just a few minutes.
Example of a Cash-out Refinance
Investors can refinance their primary residence as well as any investment properties they already own with generally the same terms. Investors start by assessing the difference between an existing property’s FMV and its existing loan balance. If there is at least a 30 percent to 40 percent difference, it might make sense to execute a cash-out refinance.
For example, investors might want additional capital to either make improvements on an existing property or to purchase a new property. Paying for an independent appraisal and looking at the value and mortgage balance of an existing investment property, the investors find the following:
- $150,000 FMV
- $90,000 remaining mortgage balance
The investors know that there is 40 percent in equity and that the property is a good candidate for a cash-out refi, derived as:
- ($150,000 – $90,000) / ($150,000) = 40 percent
From there, the investors refinance the investment property with a new loan at a 75 percent LTV ratio. This means that the investors will receive $112,500 in cash from a title or escrow company, found as:
- ($150,000 FMV) x (75 percent LTV) = $112,500
The funds are typically wired directly into the borrowers’ bank account within three days of loan approval. The investors then take the money from the refinance and completely pays off the old mortgage, leaving the investors with $22,500 in cash. This is derived as:
- ($112,500 new loan amount) – ($90,000 old mortgage balance) = $22,500
The cash is typically used to either make improvements on an existing property or as a down payment to purchase a new investment property. As part of the cash-out refinance, borrowers will typically have to cover the following expenses:
- 2 percent to 5 percent closing costs
- 0 percent to 3 percent loan origination fees
These fees are taken directly out of the loan, reducing the total loan amount by as much as 8 percent. With 2 percent in closing costs and 1 percent in loan origination fees, for example, the loan amount is reduced to:
- ($112,500 loan amount) – ($112,500 x 2 percent closing costs) – ($112,500 x 1 percent origination fees) = $109,125 loan amount
This reduces the amount of cash that investors receive to:
- ($109,125 loan amount) – ($90,000 old mortgage balance) = $19,125
At the end of this cash-out refi, the investors will have $19,125 in cash to invest in other real estate assets or renovations. Further, assuming the term is the same, investors typically have a slightly lower interest rate and a slightly higher down payment, causing the new monthly loan payment to be less than the old monthly mortgage payment.
Cash-out Refinance Tax Implications
A cash-out refinance generally allows borrowers to access a large sum of cash tax-free by using their home’s equity. You don’t have to pay taxes on the money you take out because the IRS doesn’t consider it “earned income.” Instead, the money is coming from equity in your home that you’re accessing by refinancing into a larger loan, paying off your first loan and keeping the difference in cash.
The interest on this new loan is generally tax deductible, just like it is on any mortgage loan so you can write off your interest payments at the end of the tax year. However, keep in mind that if you plan on selling the property, you still have to pay capital gains tax on your profits unless you do a 1031 exchange. Since these tax scenarios can get complicated, we suggest consulting with your tax professional before making any major decision.
Pros & Cons of a Cash-out Refinance
A cash-out refinance can be a great way to pay off your existing mortgage and get some extra cash to pay off debt, fix up a property or even purchase a new property. However, it does have some drawbacks, such as having to pay additional closing costs.
Pros of a Cash-out Refinance
- Cash to spend however you want
- Debt consolidation
- Interest rate is usually lower than existing loan
- Tax deductions on the interest
Cons of a Cash-out Refinance
- Possibly a longer loan term
- You have to pay 2 percent to 5 percent in closing costs
- Some banks require you to own the property for more than six months to qualify
Cash-out Refinance vs. Home Equity Loans
A home equity loan is a second mortgage taken out on a home in order to pay for large items, such as education, home improvements, medical bills or something similar. It’s doesn’t replace or pay off the existing mortgage. This is different from a cash-out refinance, which pays off the existing mortgage with a larger loan and the borrowers get the difference in cash.
There are generally three types of home equity loans:
- Home equity loan (HEL): One-time lump sum loan paid back over a specific amount of time.
- Home equity line of credit (HELOC): Revolving credit line based on the value of a home.
- Investment property line of credit (LOC): Revolving line of credit for a non-owner-occupied property
Further, a cash-out refinance will typically have a lower interest rate and a longer term than a home equity loan or line of credit. We recommend that investors explore its cash-out refinance options first before looking into HELs and HELOCs.
Still, there might a few occasions when a home equity loan is a good alternative to a cash-out refi. Since HELOCs are lines of credit, for example, short-term fix-and-flippers can take out a HELOC and wait to use it when the opportunity arises. This isn’t possible with a cash-out refi or a HEL, both of which issue a lump sum amount and charge fixed monthly payments.
If you’re interested in more information on home equity loans, check out our in-depth guide on when to use a home equity loan or line of credit.
Visio Lending is a national lender that offers both single property rental loans and portfolio rental loans for three to seven rental properties. You can generally get from $45,000 to $2 million with 75 percent to 80 percent LTV, 30-year terms and competitive rates for prime borrowers. Apply online in minutes to see how much you qualify for.
The Bottom Line
A cash-out refinance is used by investors to extract equity from existing properties in an attempt to make other investments. The money gained from a cash-out refi can be used to purchase a new property or renovate an existing property. In addition, both owner-occupied primary residences, as well as non-owner-occupied investment properties, can be used in a cash-out refi.
If you’re looking for a cash-out refi, check out Visio Lending. It offers a 30-year fixed-rate rental loan designed to get cash-out from an existing rental property. Rates are competitive for prime borrowers and its online application takes minutes. Unlock your property’s equity today.