Cash-Out Refinance on an Investment Property: How It Works

A cash-out refinance replaces your current mortgage with a new, larger loan and gives you the difference in cash. For real estate investors, it is a way to turn equity in one property into money for the next deal, for renovations, or for paying off higher-cost debt. It is a powerful tool, and it works best when the numbers are clear before you start.

How a cash-out refinance works

Suppose a property is worth $400,000 and you owe $200,000. You have $200,000 in equity. A new loan of up to a certain percentage of the value, say 75% or 80%, would be $300,000 or $320,000. The new loan pays off the old $200,000 balance, and after fees, the remainder comes to you as cash. That example is hypothetical and is only meant to show how the math works.

Loan-to-value limits

Lenders limit how much you can borrow against a property using loan-to-value, or LTV. On investment properties, the maximum LTV is usually lower than on a primary residence, because the lender takes more risk. Our cash-out refinance program offers up to 80% LTV for qualifying borrowers. The limit you get depends on the property type, the credit profile, and the value that an appraisal supports.

Common ways investors use the cash

• Down payment or purchase funds for the next property
• Renovation of the property being refinanced, or a different one
• Paying off short-term loans, such as a hard money or bridge loan, with a longer-term loan
• Consolidating higher-cost debt into a lower-cost loan
• Building reserves so the portfolio can handle vacancies and repairs

The costs to compare

A refinance has closing costs, and a cash-out loan can carry a slightly higher rate than a plain rate-and-term refinance. Consider:

• The interest rate and how it compares with your current loan
• Origination fees, appraisal, title, and other closing costs
• Whether the loan has a prepayment penalty
• The new monthly payment and whether the property's rent covers it

Also compare the total cost of the new loan to the return you expect from the cash. Borrowing at 7% to put money into a project that will earn far more can make sense. Borrowing to cover a shortfall with no plan does not.

Seasoning and timing

Some lenders require you to have owned the property for a certain period before a cash-out refinance, often called seasoning. Requirements vary by lender and program. If you recently bought the property, ask what is allowed before you count on the cash.

Risks to think through

• More debt on the property. A larger loan means a larger payment and less equity cushion if values drop.
• Rent must cover the payment. If the rent does not cover the new loan, the property becomes a monthly cost.
• Variable outcomes on the property's value. The appraisal determines how much you can borrow, and it can come in lower than expected.
• Prepayment terms. If you may sell or refinance again soon, a prepayment penalty can be expensive.

Cash-out refinance versus other options

If the property is a stabilized rental, a DSCR loan can be used for a cash-out refinance too, since it is underwritten on the property's rent. If you need speed or the property is not stabilized yet, a bridge loan may do the job first, followed by a long-term refinance. Comparing structures with a lender who knows several programs can help you find the lowest total cost for your situation.

What to have ready

1. The property address and your current loan statement
2. A current lease or rent history, if the property is rented
3. Proof of insurance and your entity documents if the property is in an LLC
4. Your plan for the cash and a realistic estimate of the property's value

Rates, terms, and approval depend on the borrower, the property, and the lender. This guide is educational and is not a commitment to lend.