SHOULD I DO A CASH-OUT REFINANCE TO PURCHASE AN INVESTMENT PROPERTY?
By Jessica Hudson | July 1, 2022
What Is a Cash-Out Refinance?
A cash-out refinance is when you take a loan out on your current property at a higher amount than you currently owe, and you receive the excess as a cash payment. This can be an alluring option for homeowners who want some extra cash for things like renovations and improvements.
How Much Can I Get, and When Will I Get It?
As a general rule, the maximum amount you can withdraw is 80% of your loan-to-value ratio. As an example, let’s say your home is worth $500,000 and you still owe $200,000 on the mortgage. Ensuring you keep 20% equity in your home after the transaction, this means you could get up to $200,000. Cash-out refinances take approximately 30 days to close and receive your funds.
When a Cash-Out Refinance Makes Sense
If you have at least 30% equity in your home, a good credit score, and a good plan for how you will use the extra money, you’re on the right track. Typically, cash-out refinances have a higher interest rate than rate/term refinances so you will want to evaluate what the potentially higher interest rate and higher loan balance will mean in terms of monthly mortgage payment.
Using Your Proceeds to Purchase an Investment Property
Common uses of cash-out proceeds are home-improvement projects, consolidating or paying off high-interest debt, or paying for higher education. Another option is to use your existing home equity towards an investment property. The financial principals are simple. By making smart investments in real estate, you can make money in two ways. First, real estate generally appreciates when you look at it long-term. Second, by renting it out, you can generate a monthly income. Keep in mind, you will need at least 25% down for an investment property. Buying a rental property can also yield tax benefits, such as deducting operating expenses from rental income and claiming depreciation expense to reduce pretax net income.