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Cash out refinance on a rental property: 2020 rates and guidelines

Tim Lucas
The Mortgage Reports editor

It’s a good time to pull cash out from your investment property

Home prices are up — way up.

According to the Federal Housing Finance Agency, home values have increased by about $100,000 since 2012. 

This makes it a great time for real estate investors to “cash out” the equity in their rental properties. The cash can be used to:  

  • Buy another rental property
  • Make home improvements
  • Pay off other real estate loans
  • Reduce personal debt
  • Stash away emergency cash 

With mortgage rates near record lows, it could be time for rental property owners to put their equity to work.

Verify your cash out refinance eligibility (Sep 22nd, 2020)

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How to get a cash out refinance on an investment property

Because investment properties are “non-owner-occupied,” there are special rules about refinancing and taking cash out. 

For instance, your credit score needs to be quite good, usually at least 680.

And your cash out refinance must leave you with at least 25% equity in the rental property and decent cash reserves in your bank account.

In addition, you can only use a conventional loan to complete a cash-out refinance on a rental property.

That means you won’t be able to refinance using any government-backed loans like FHA, VA, or USDA. 

Instead, you’ll need a loan backed by Fannie Mae or Freddie Mac — the two major agencies that set rules for most U.S. mortgages. 

Luckily, conventional refinance rules  are fairly lenient, making it possible for many landlords with investment equity to cash out on their rental properties. 

Verify your cash out refinance eligibility (Sep 22nd, 2020)

Investment property refinance rates 

Rates for a cash out investment property loan tend to be on the high end for mortgage rates. 

Why? Because 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 lenders take on more risk when a homeowner pulls equity out of their property. 

Find a low cash out refinance rate (Sep 22nd, 2020)

When to use a cash out refinance on your investment property

Cashing out equity is one of the best ways to profit from your investment property. 

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 and payment.

But a cash-out refinance rental property loan can put a good portion of the home’s value to work.

For instance, you might use the cashed out equity to make improvements on a rental property. 

Home improvements can yield a double-return. They increase the home’s value while justifying higher rent. And, tenants feel great about staying in the property long-term.

Perhaps the best use — and highest return — for cash-out funds is to expand a real estate portfolio.

But perhaps the best use — and highest return — for cash-out funds is to expand a real estate portfolio.

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. 

In this way, a cash out investment property loan can help build your real estate portfolio and your earning power through new rental opportunities. 

Maximum LTV for rental property refinances

Your LTV — or “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 withdraw a worthwhile amount, while still leaving enough to keep your loan below allowable LTV limits

Most lenders follow loan-to-value (LTV) rules set by Fannie Mae and Freddie Mac. When it comes to LTV, Freddie Mac is slightly more lenient than Fannie Mae, especially if you aren’t taking cash out.

The following is a snapshot of LTV limits for both agencies. Included are LTVs for cash-out and no-cash-out refinances.

Fannie Mae rental property refinance max LTV

  Units Fixed-Rate ARM
No-Cash Refinance 1-4 unit 75% LTV 75% LTV
Cash-Out Refinance 1-unit 75% LTV 75% LTV
2-4 unit 70% LTV 70% LTV

Freddie Mac rental property refinance max LTV

  Units Fixed-Rate ARM
No-Cash Refinance 1-unit 85% LTV 85% LTV
2-4 unit 75% LTV 75% LTV
Cash-Out Refinance 1-unit 75% LTV 75% LTV
2-4 unit 70% LTV 70% LTV

If you are “on the line” as far as LTV, find a lender that underwrites by Freddie Mac rules instead of Fannie Mae. That’s especially important if you are looking for an ARM.

Some lenders can only approve loans to Fannie Mae standards, some to Freddie Mac, and some to both. Shop around until you find the right lender for your situation.

Keep in mind, too, that many lenders are offering loans outside of Fannie/Freddie rules. They create their own programs that are more lenient on LTV, cash-out, credit, and more.

If your scenario isn’t within the Fannie/Freddie “box”, one of these lenders could help.

Minimum credit score and cash reserves to qualify 

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 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.

Investment property cash-out loan applicants must also have adequate cash reserves, not including any cash received from the transaction.

Minimum reserves are determined based on the proposed payment on the property, and whether other properties are owned. Expect to have anywhere from zero to 12 months of the property’s future payment in a verifiable asset account.

You may also be required to hold in reserve between 2-6% of any unpaid loan balances on any property beside the subject property and your primary residence.

Cash-out refinance waiting periods

Many home investors buy a run-down property with plans to fix it up. You may plan to fix-and-flip using a cash-out refinance to fund home improvements. 

While this is allowed, waiting 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. 

The exceptions to this rule are as follows.

  • 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%. 

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.

Because there are no loans on an all-cash home purchase, any subsequent refinance is technically a cash-out one.

Normally, the rental property home buyer would need to wait 6 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 days — not months — after closing.

Guidelines for delayed financing are as follows.

  • The buyer paid all 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.

This is the uniform document used since 2015 that replaced the HUD-1. It details closing fees, plus any loans, taken out on the property.

Verify your cash out refinance eligibility (Sep 22nd, 2020)

Personal loans: An alternative to cash-out refinancing

When you start looking into cash-out refinances, you’ll probably discover that there are closing costs involved, and they take 30-45 days to complete.

One alternative is a personal loan. These come with a few advantages:

  • Receive funds in less than a week in some cases
  • Skip closing costs like title, escrow, appraisal, and many lender fees
  • You don’t have to touch the existing loan on the property

If you’re seeking cash less than $50,000, look into a personal loan. For instance, if you’re paying $5,000 in closing costs with a cash-out refinance, and only netting $25,000, that’s a 20% surcharge to receive those funds.

Plus, you reset your existing mortgage, potentially paying more in interest over the life of the loan.

Personal loans may be cheaper in the long run, despite higher rates.

Cash out refinance on investment property FAQ

How do I pull equity out of my investment property?

You may be able to pull equity out of your investment property using a cash out refinance. For many landlords, this is a good strategy right now as refinance rates are near all-time lows. You may also be able to take equity out of an investment property using a home equity line of credit. But this is more difficult to do than getting a HELOC on your primary residence.

How much equity can I pull out of a rental property?

The amount of equity you can pull out depends how much equity you currently have. Cash out refinances for rental properties have a maximum loan-to-value ratio of 75% — meaning you can only take out enough equity so that 25% is left in the home. 

For example, imagine you own an investment property worth $300,000 and you currently owe $200,000 on the mortgage. Do you have $100,000 in usable equity? 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. And the remainder — $25,000 — is your actual, tappable equity.

Are rates higher for cash out refinance?

Yes, rates are generally a little higher for cash out refinance than a no-cash refinance. That’s because the homeowner is taking out a bigger loan, and thus creating more risk for the lender. There’s no formula to tell you how much higher rates will be for a cash out refinance — to find out, you’ll have to check rates from a few lenders and see what you qualify for.

What is the max LTV on an investment property?

Generally, you need at least 15-20% down to buy an investment property. That means the max LTV is 80-85%. For an investment property cash out refinance, the max LTV is 70-75% depending on your lender and whether the loan is fixed-rate or adjustable-rate.

Should I get a cash out refinance to pay off debt?

A cash-out refinance is a viable way to pay off debt, especially if you have lots of high interest debt that’s sapping your income. Mortgage rates are currently near record lows, so by cashing out equity to pay off higher-interest loans, you can essentially consolidate all that debt under a lower interest rate. 

However, the ‘refinance to pay off debt’ method isn’t for everyone. Cash out refinances have more stringent requirements that typical refinances — especially if you’re cashing out equity from an investment property. Whether or not this strategy will work for you depends on how much equity you have, your credit, your current debts, and other factors.

Is it hard to refinance a rental property?

It’s a bit harder to refinance a rental property than a property you live in. For one, credit requirements and LTV ratios are usually stricter. And your choice of loans and/or lenders may be limited — especially if you want a cash out refinance on your rental property. However, it’s still doable for many. Shop around and explore your options to find a lender willing to work with you.

What are today’s cash-out refinance rental property mortgage rates?

Current mortgage rates are low — still half their historical norm of over 8%. It’s a limited opportunity to cash-out a rental and perhaps find a lower interest rate, too.

Check today’s rental property refinance rates to see what you qualify for.

Verify your new rate (Sep 22nd, 2020)

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