Curve

How to use a cash-out refinance to buy another home [VIDEO]

Peter Miller
The Mortgage Reports contributor

Cash-out refinance your current home to buy a second home

The average homeowner gained about $5,300 in equity in 2019. And in some states, more than $20,000

Homeowners can profit from that equity by using a cash-out refinance to buy a second home or investment property. 

Many people use a cash-out refinance for a down payment on their next place. 

Or if you’ve built lots of equity, you might even be able to refinance and buy a second house with cash. 

Explore your options using the link below. 

Verify your cash-out loan eligibility now. (Feb 28th, 2020)

In this article:


Using a cash-out refinance to buy a second home or investment property

One way to buy a vacation or rental home is by using the equity in your current residence. With a cash-out refinance, you can take out up to 80% of your equity and use the funds to purchase a new house. You might also refinance into a lower interest rate at the same time. 

But there are a few basic things you should know before you go this route.

  1. Your ability depends on the amount of your home equity and your credit rating
  2. If you want to buy and then sell or refinance one of the homes, consider a bridge loan
  3. In some cases, a home equity loan or HELOC might be the most affordable and fastest choice
  4. A personal loan>> is a fast, inexpensive way to get funds needed for a home purchase

To find out whether you’re eligible for a cash-out refinance — and how much money you could pull out — start here. 

Check your cash-out options here (Feb 28th, 2020)

Cash-out refinance eligibility: How much equity do you have?

At first, it may seem that the equity issue is simple. You bought a house for $150,000 and it’s now worth $275,000.

Related: FHA cash-out refinance guidelines for 2020

You’ve paid down principal, too, so your current equity is $190,000.

So, can you really get a check for almost $190,000 from lenders?

The short answer is, no.

Lenders generally will allow cash-out refinancing equal to 80 percent of your equity. They will see a property value of $275,000 and subtract 20 percent ($55,000). That will leave around $220,000. This money will be used to first repay the existing loan of $85,000.

The balance – $135,000 – represents the cash available to the borrower.

With some programs, you might do better.

The VA cash-out mortgage allows qualified borrowers to refinance up to 100 percent of their equity, and the FHA cash-out loan will go to 80 percent. However, these programs come with various charges and insurance costs that many borrowers with equity will want to avoid.

Cash-out refinance rules

Taking a cash-out refinance to buy a home or investment property is one of the best ways to put your equity to use

However, you should plan to stay in your current home if you want to use the cash-out funds to buy a second home immediately.

Cash-out refinance to buy an investment property

In terms of real estate, you can use real estate equity to immediately buy a second home or to purchase an investment property.

As soon as you close the cash-out refi, you can use those funds as a down payment on another home — or to buy the house outright — if you plan to keep the current home as your primary residence.

Related: How long does it take to refinance?

That means you’ll keep living in the house you’re cashing out, and only use the second home as a vacation property or investment.

Cash-out refinance to buy a second home

However, with cash-out refinancing or a home equity line of credit (a HELOC), you generally cannot use such funds to instantly buy another home with you are moving into.

Related: 4 alternatives to a cash-out refinance

How come? There’s no restriction on the use of cash-out funds.

However, cash-out refinancing and HELOCs generally have a clause which says you expect to remain in the property for at least a year.

This means you cannot get a check at closing and buy a replacement home the following week. That would be a violation of the mortgage terms. Violate the rules, and the lender has the right to call the loan, to demand immediate repayment.

For details and specifics speak with lenders about your options.

Alternatives to cash-out refinance for buying a second home

HELOCs

You can certainly use a HELOC to pull equity out of a home. There are typically few up-front costs. It’s like a credit card. During the first few years of the loan term, you can take money out and put it back.

Related: Need money? A HELOC could be your solution

However, HELOC have several drawbacks. First, the interest rate is likely to be adjustable rather than fixed. Second, the interest rate will be higher than a typical first mortgage. How much higher depends on your credit, the amount borrowed, location and equity. Third, you have to watch HELOC balances to avoid steep monthly costs.

HELOCs are typically structured with two phases:

  1. The drawing phase. You can draw money out and put money back in. You make interest-only payments on the balance.
  2. Repayment period. You can no longer draw money out and must repay the balance over the remaining term of the loan. If you have a big HELOC balance, the result can be large monthly repayment costs.

Personal loans

One overlooked option is a personal loan. These loans are faster and cheaper than a cash-out refinance because you skip title, escrow, an appraisal, or other closing costs.

Personal loans are based on your credit and income history, not the property. This increases speed and efficiency.

They can be approved in a day, and you can have funds in less than a week. Loan amounts are typically under $50,000, but some lenders can approve up to $100,000.

If you’re looking to make a quick purchase, and don’t want to spend a mint on closing costs, a personal loan might be the best route for you.

Check my rate for a personal loan up to $100k * (Feb 28th, 2020)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV

Bridge loans

While cash-out refinancing and HELOCs may not be structured to help with the purchase of a replacement home, that’s not the case with bridge loans. A “bridge” loan is specifically designed to help you move equity from one residence to the next.

Related: Bridge loans (finance your housing transition)

The great attraction of a bridge loan is that it’s intended to be short-term financing. It might be outstanding for just a few months. You don’t have to make monthly payments.

There are also downsides. The interest rate is likely to be high. Maybe two percent above typical mortgage rates. Also, there can be a lot of up-front fees.

Still, a bridge loan will do the job if you want to purchase a replacement home. When you sell your current residence, the bridge loan will be paid off at closing. The cost does not carry over to the new property.


Q&A: Using a cash-out refinance to buy a second home

Can I buy a second home with my equity?

Yes, you can use the equity in your current home to buy a second home. Many people do this by taking a cash-out refinance on their house, and using the withdrawn money to make a down payment on a second home or pay for it with cash. But you could also tap your equity and buy a second property using a home equity loan or line of credit (HELOC). Learn more about home equity loans and HELOCs here

How much cash out can I get on a refinance? 

When you do a cash-out refinance, you usually have to leave 20% equity in the home. That means you can only take out enough cash that your total loan amount equals 80% of the home’s value. For example: If your home is worth $250,000, and you owe $150,000 on it, the most cash you could get out would be $50,000. ($50,000 + $150,000 = $200,000, which is 80% of $250,000.)

Can I refinance my home to buy an investment property?

It’s possible to use a cash-out refinance on your home to buy an investment property. You could use the withdrawn money to make a down payment or buy the investment property with cash. And you can do this as soon as the refinance closes. However, you still have to meet your lender’s credit requirements for refinancing. And you’ll likely need a fair amount of equity in your current home, as lenders usually require 15-25% down to purchase an investment property.

How soon after refinancing can I buy another home?

If you plan to buy a vacation home or an investment property, you can buy as soon as your refinance closes and you have the cash in hand. However, you cannot buy a separate primary residence using a cash-out refinance and then move into it right away. That’s because lenders usually require you to stay in your current home for at least a year if you’re getting cash out on it. But you could convert your primary residence into a rental and get a cash out loan based on non-owner-occupied mortgage rates and rules.

How long does it take to get cash out from a refinance?

If you’re using a cash-out refinance, you’ll get the funds once the loan closes. Closing a refinance takes about 35-45 days on average.

Can you pull equity out of a rental property?

Yes, you can pull equity out of a rental property using a cash-out refinance. In fact, many investors take equity out of their rentals to make home improvements or buy new rental properties. You just need to have enough equity to leave at least 25% in the property. And you’ll also need to meet the lender’s credit requirements. Learn all about cash-out refinances for rental properties here.


Shop cash-out refinance rates today

Mortgage lenders are eager to work with you to find the best solution. Contact the nation’s top lenders and shop for your best rate whether you are getting a cash-out, HELOC, or other loan type.

Shop the nation's top lenders here. (Feb 28th, 2020)

Step by Step Guide

Investment Properties