It’s a good time to cash-out refinance investment property
Opting to cash-out refinance investment property might be an attractive strategy for real estate investors with home prices on the rise, according to housing market data from CoreLogic.Check your cash-out refinance eligibility. Start here
This spike in market values presents a prime opportunity for property owners to liquidate the equity in their rental properties. This cash can be used for any purpose, including purchasing more investment properties.
As property values continue on an upward trajectory, the timing could be ideal for landlords to put their equity to work.
In this article (Skip to…)
- How it works
- How much cash can I get?
- Cash-out requirements
- Pros and cons
- Interest rates
- Delayed financing
What is a cash-out refinance?
A cash-out refinance offers homeowners the opportunity to leverage the accumulated equity in their property by refinancing their existing mortgage into a new loan that is larger than the current one, providing them with the difference in cash.
You can use that cash for anything you like, including consolidating credit card debt, investing in home improvements, or fulfilling other substantial financial goals.
What is considered an investment property?
An investment property is a real estate asset purchased to generate income through rental payments, future resale, or both, instead of serving as the owner’s primary residence.
When considering the option to cash-out refinance investment property, it’s important to recognize that they are viewed differently than principal residences. Investment properties aren’t eligible for government-backed mortgages like FHA loans, USDA loans, or VA loans; those programs are only applicable to owner-occupied primary residences.
How a cash-out refinance works on a rental property
With home values on the rise across the nation, many real estate investors are equity-rich. One good way to tap that equity is to cash-out refinance investment property.Check your cash-out refinance eligibility. Start here
Cash-out refinancing works much the same for an investment property as for a primary residence. You take out a new loan for more than you currently owe, which is used to pay off your current mortgage. Then you receive the difference as a lump sum of cash.
Special rules for cashing out an investment property
There are just two main things to keep in mind when refinancing an investment or rental property:
- The requirements are a little stricter; you need good credit and more than 25% equity to cash out
- Interest rates for an investment property cash-out refinance are higher
Luckily, today’s mortgage rates remain low by historical standards. So many investors are able to cash-out refinance investment property and still lock in an affordable rate on their new mortgage.
How much equity can I cash out of my investment property?
The amount of equity you can cash out depends on the current value of your home and your existing loan balance.Check your cash-out refi eligibility. Start here
Investment property cash-out loans have a maximum loan-to-value ratio (LTV) of 25% to 30%.
That means you must leave 25–30% of your home equity untouched, so you’ll likely need more than 30% equity to cash out.
- Imagine you own a one-unit property worth $300,000 and you currently owe $200,000 on the mortgage
- Do you have $100,000 in usable equity? No, not quite
- Your new cash-out refinance loan has a maximum LTV of 75%, or $225,000 on a $300,000 home
- $200,000 of that loan is used to pay off your existing loan balance
- The remaining $25,000 is your tappable equity
Investment property cash-out refinance requirements
Both Fannie Mae and Freddie Mac allow cash-out refinancing on investment properties. But the rules are a little stricter than for a cash-out refi on a primary residence. Borrowers need:Check your cash-out refinance eligibility. Start here
- Higher credit scores: Usually 680 and up
- Cash reserves: Up to 12 months’ worth of monthly mortgage payments
- Plenty of home equity: More than 25%
- Seasoning period: A waiting period, or seasoning period, of six months to refinance after the initial purchase of your investment property
Here’s a little more about what to expect when you apply to cash-out refinance investment property.
1. Minimum credit score
Underwriting is more stringent for a cash-out refinance of an investment property. In other words, it’s harder to qualify for this type of loan.
For one, Fannie Mae says the minimum FICO score allowed is 620. But many mortgage lenders set their own minimum as high as 680 or 700.
If you have a low credit score, do some shopping. Some lenders will have lower minimums than others.
2. Minimum cash reserves
Investment property owners must also have adequate cash savings, not including any cash received from the transaction.
Minimum reserves are determined based on your new mortgage payments and whether other properties are owned. Expect to need anywhere from zero to 12 months of the property’s future mortgage payment in a verifiable asset account.
You may also be required to hold cash reserves equal to 2% to 6% of any unpaid loan balances on properties other than the one being refinanced and your primary residence.
3. Maximum loan-to-value ratio
Your loan-to-value ratio determines your eligibility for a cash-out refinance on a rental property.
You’ll need substantial equity in the home to cash out a worthwhile amount while still leaving enough to keep your loan amount below allowable LTV limits
Most lenders follow LTV rules set by Fannie Mae and Freddie Mac, which are as follows.
Fannie Mae rental property refinance max LTV:
|Type of Refinance
Freddie Mac rental property refinance max LTV:
|Type of Refinance
The agencies used to enforce different LTV limits for adjustable-rate mortgages, but today those limits are the same as for fixed-rate mortgages.
Some loan officers can only approve loans to Fannie Mae standards, some to Freddie Mac, and some to both. Shop around until you find the right mortgage lender for your situation.Check your cash-out refinance eligibility. Start here
Keep in mind, too, that many lenders are offering loans outside of Fannie and Freddie’s rules. Lenders that offer non-conforming or “non-QM” loans can make their own programs that are more lenient on LTV, cash-out, credit, and more.
If your scenario isn’t within conforming loan requirements, one of these lenders could help.
4. Waiting periods
Many home investors buy a run-down properties with plans to fix them up. You may plan to fix-and-flip using a cash-out refinance to fund home improvements.
While this is allowed, waiting periods—also known as “seasoning periods”—apply.
You must wait at least six months between the home sale closing and the date you can close on a cash-out refinance.
There are only a few exceptions to this rule, including:
- The property was inherited
- The home was legally awarded via divorce or other separation order
- The cash-out refinance qualifies for the delayed financing exception
In addition, homes that have been on the market in the last six months have a lower allowable LTV for cash-out refinancing, which maxes out at 70%.Check your cash-out refinance eligibility. Start here
Why cash-out refinance investment property
Still on the fence about whether cashing-out equity is right for you? It’s helpful to know why real estate investors often do it. Here are four reasons why it can be beneficial to cash-out refinance investment property.
Unlocking equity for improvements and upgrades
When you choose to cash-out refinance investment property, it’s like giving your investment a power-up. This move can unlock the appraised value of your property, allowing you to funnel this capital into meaningful upgrades. By doing this, not only do you enhance the living experience for tenants, but you also potentially increase the property’s market value, which is a smart long-term play.
Smarter debt management
When you cash-out refinance investment property, your lender may take the opportunity to adjust the terms of your mortgage loan. This shuffling could include consolidating other debts that might be at higher interest rates. This reshuffling can result in a more manageable financial situation where potentially tax-deductible interest payments on your property’s mortgage bring added fiscal benefits when it’s time to review your tax returns.
Diversifying your portfolio
For investors, the capital gained from a cash-out refinance investment property can be the key to diversifying an investment portfolio. This strategic reinvestment can open new doors to other real estate opportunities or different asset classes, using the existing value of one property to increase the worth of all investments under your management.
The ability to cash-out refinance investment property prepares investors for market shifts. Locking in a mortgage based on the current appraised value can protect against future economic changes. This not only provides a buffer but also positions an investor with the necessary liquidity to take advantage of new opportunities, maintaining a robust and adaptable investment strategy.
Pros and cons: Cash-out refinancing an investment property
When considering ways to leverage the value of your property, you might ponder whether to cash-out refinance investment property.Check your cash-out refinance eligibility. Start here
This financial move can be a gateway to new opportunities but it’s not without its drawbacks. Here’s what you should weigh before diving in:
- Access to a lump sum of money: A major plus is that it provides you with a significant amount of cash, which can be used for property improvements, other investments, or diversifying your portfolio
- Potential tax deductions: The interest paid on the refinanced amount might be tax-deductible, although it’s wise to consult with a tax professional
- Improved loan terms: Refinancing could land you a loan with better terms, possibly reducing your interest rate and monthly payments
- Opportunity for further investments: With the cash in hand, you can reinvest in the market, potentially expanding your real estate footprint or branching out into other types of investments
- Closing costs: Refinancing isn’t free. Closing costs can take a bite out of the funds you receive.
- Increased mortgage balance: You will be increasing your mortgage balance, potentially extending the time it will take to pay off your property.
- Risk of foreclosure: If you fail to keep up with the new loan terms, your investment property could be at risk.
- Market fluctuations: If the market takes a downturn, the value of the property could decrease, which may affect your loan-to-value ratio and financial strategy.
When deciding to cash-out refinance investment property, it’s important to analyze both the immediate benefits and the long-term implications. It can indeed be a strategic financial decision, but it requires thorough consideration to ensure it aligns with your investment goals and financial health.
Investment property refinance rates
Mortgage interest rates for a cash-out investment property loan tend to be higher than other loan programs.Check your cash-out refinance eligibility. Start here
Why? Investment property rates are higher to begin with—about 0.5% to 0.75% above primary residence rates on average.
And if you take cash out when refinancing, rates are usually a little higher still. That’s because mortgage lenders take on more risk when a homeowner pulls equity out of their property.
The best thing you can do when shopping for this type of loan is get rates from multiple loan officers.
New regulations on investment property mortgages mean that rates and fees could vary a lot by lender. So compare at least 3–53-5 loan offers to find the best deal. You could stand to save thousands on your new loan.
Should I cash-out refi my rental property?
Cashing out equity is one of the best ways to profit from your investment property.Compare cash-out refinance rates. Start here
Unused equity in the home may look good on paper, and for many investors, that’s fine. They have cash flow and don’t want to increase their loan balance or monthly payments.
But a cash-out refinance loan for a rental property can put a good portion of the value of your home to work.
- Home improvements can yield a double return. Home renovations can increase the home’s value while justifying higher rent. And tenants feel great about staying in the property long-term
- Buying an additional investment property. Expanding your real estate investment portfolio is a popular use for cash-out funds. For example, say you have a property worth $250,000 with a loan of $150,000. You can get a cash-out loan up to 75% of the current value, netting about $37,000. This money could be used to put 20% down on another rental home worth around $200,000
- Pay off other real estate loans or reduce personal debt. Some borrowers pay off high-interest credit card debt or installment loans, like personal loans, to lower their debt-to-income ratio
In this way, a cash-out refinance investment property loan can help build your real estate investing portfolio and your earning power through new rental income.
Alternatives to cash-out refinancing investment property
While opting to cash-out refinance investment property is a popular choice for many investors seeking to tap into their property’s equity, it’s by no means the only strategy available.
Home equity line of credit (HELOC)
One such alternative is acquiring a HELOC. A HELOC is a revolving line of credit that can be borrowed against and repaid as needed. It functions similarly to a credit card with your home’s value as collateral.
During the initial draw period, you can borrow money up to a certain limit and only pay interest on the amount you’ve borrowed. It provides flexibility and easy access to funds without the need to refinance your existing mortgage. Keep in mind that your home is collateral, so borrow wisely.Check your HELOC options. Start here
Home equity loan
Another route is a home equity loan, which acts as a second mortgage on your rental property. This means you can leave your current mortgage intact while still accessing a lump sum of cash based on the equity you’ve built up in your property.
Home equity loans can be advantageous for those who have secured a favorable interest rate on their primary mortgage that they wish to retain.Check your home equity loan options. Start here
For those not wishing to cash-out refinance investment property, a personal loan could be a consideration. Personal loans are based on creditworthiness rather than home equity and can offer a quick source of funds without using the property as collateral. However, they often come with higher interest rates compared to secured loans.
Investment property owners may also explore peer-to-peer lending or private financing as an alternative to cash-out refinance investment property. These avenues can offer competitive lending options without the strict requirements or lengthy processes typical of traditional bank financing.
Refinancing a rental property you bought with cash
“Delayed financing” refers to the practice of buying a home with cash, then reimbursing the purchase with a refinance.Check your cash-out refinance eligibility. Start here
Because there are no loans on an all-cash home purchase, any subsequent refinance is technically a cash-out one.
Normally, the rental property buyer would need to wait six months to get reimbursed per standard cash-out rules. That ties up a lot of cash for a long time—not the ideal situation for a savvy investor who wants to put their money to work elsewhere.
So, in mid-2011, Fannie Mae rolled out the “delayed financing exception.” Home investors may now receive a cash-out refinance just days—not months—after closing.
Guidelines for delayed financing are as follows:
- The buyer paid cash for the home
- The buyer must document the source of funds for purchase
- Loans or liens opened to buy the home must be paid off with the new loan
- A title search must confirm no financing on the purchased home
Keep all documentation for the home purchase if you plan to use the delayed financing exception. Most importantly, keep a final Closing Disclosure showing your closing date and loan terms.
Verify your cash-out refinance eligibility. Start here
FAQ: How to cash-out refinance investment property
Opting to cash-out refinance investment property could be an effective approach to pull equity from your rental, especially as refinance rates are competitive. This method allows you to tap into the home’s equity for immediate use. Alternatively, you could use a home equity loan or home equity line of credit (HELOC), although these are typically more challenging to secure than a second mortgage on a primary residence.
To cash-out refinance investment property, you’re required to maintain 25 to 30 percent of the property’s value untouched, which varies by the number of units. This stipulation means you’ll need substantially more than 25 to 30 percent equity to make the process financially sensible.
Closing costs on a cash-out refinance typically range from about 2 to 5 percent of the new loan amount, echoing the costs of a traditional refinance. These will include various fees, such as origination and underwriting but not the commission fees associated with real estate agents or Realtors, as no property sale is occurring.
Interest rates tend to be higher when you choose to cash-out refinance investment property, given the larger loan amount and increased risk for the lender. The exact rate premium can vary, so it’s advisable to shop around with different lenders to see what rates you might qualify for.
You need at least a 15-20 percent down payment to buy an investment property. That means the max LTV is 80-85 percent. For an investment property cash-out refinance, the max LTV is 70-75 percent depending on your lender and whether the loan is fixed-rate or adjustable-rate.
Using a cash-out refinance investment property to pay off debt can be a smart financial strategy, particularly for consolidating high-interest credit card debt under a mortgage with a lower interest rate. However, the suitability of this method depends on your individual financial details, including your equity amount, credit score, debt-to-income ratio, and other variables.
Refinancing a rental property can be more challenging than refinancing a primary residence due to stricter credit requirements and LTV ratios. If you’re aiming to cash-out refinance investment property, your options in terms of lenders and loan products might be more limited, but with thorough research and shopping around, many property owners find it achievable.
No you cannot use an FHA loan to cash out an income-earning property. For those wishing to cash-out refinance investment property, a conventional loan is required. Being exclusively available for owner-occupied primary residences, government-backed loans do not permit financing for rental properties.
Compare lenders that cash-out refinance investment property
As you consider the potential financial benefits of cash-out refinancing your investment property, remember that the right lender can make all the difference in maximizing your return.
Don’t leave money on the table. Take the first step towards unlocking your property’s equity and empowering your financial strategy.
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