Refinance Your Mortgage

Home prices are up — way up.

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

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 at record lows, it could be time for rental property owners to put their equity to work.

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 (speak with an advisor to talk about qualifying criteria).

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. 

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.

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. 

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%. 

Rentals properties and the art of the cash out, is not a one-size-fits-all transaction!  It requires a financial expert to guide you through the process to ensure you get the max capabilities for your money!

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