Property values have appreciated in the recent past, which means you might now have more equity. You can tap into this equity with a cash-out refinance to grow your real estate portfolio and help you flip more homes or purchase additional rentals. If you own real estate and have sufficient equity but no cash, you can leverage your existing assets to secure a hard money loan.
Cash-out refinancing allows you to get a loan for more than you owe on a property so you can keep the difference in cash. That cash can be used to purchase additional properties, make improvements, or pay down another loan.
When to Consider a Cash-Out Refinance Loan
Having equity is a valuable asset that allows you to get cash when you need it. Whether you’re in a financial pinch or want to take advantage of a hot real estate market, cash-out refinancing with a hard money lender gives you quick access to money when you need it.
Financing large purchases
If you can get a better interest rate on the refinance, you can finance large purchases and save on interest at the same time. This not only lowers your monthly mortgage payment but also gives you the freedom to invest in a growing business or build your real estate portfolio.
Getting short-term cash
If you need money to flip a property or cover a cash flow issue, cash-out refinancing with a private lender allows you to get quick cash. Even with a higher interest rate, if you can pay the loan down quickly and/or have a quick exit strategy, it’s worth it.
Improving a property to rent or sell it
Use your equity to get cash to make tenant improvements so you can rent a property or sell it at a higher value. If you own commercial property but haven’t been able to rent it out because it needs work, cash-out refinancing could be just what you need to bring in a strong tenant.
Whether you are a seasoned flipper or just getting started, you need cash to buy property and improve it so you can make a profit. Use your existing equity to cross-collateralize and acquire more properties to flip.
Purchasing short-term rentals
If you have always dreamed of creating an income stream with short-term rentals but haven’t been able to make the initial investment, you can use your equity to make your first property purchase. If you already own short-term rentals, being in a strong equity position is a great time to expand.
Cash-Out Refinance Eligibility
In order to qualify for a cash-out refinance from a traditional lender, you need sufficient equity and a minimum credit score. For an investment property, the eligibility requirements of traditional lenders might include:
- A minimum credit score of 620
- Up to 12 months of cash reserves
- A minimum percentage of equity
- A waiting period to refinance
Interest rates depend on your credit score, the loan-to-value (LTV) ratio, and how much cash you take out. A higher credit score and lower LTV leads to a better interest rate. Many lenders allow you to take out up to 80 percent of the value of the property for a primary residence or 70-75 percent for an investment property. The more equity you take out, the higher the interest rate.
If your credit isn’t strong but you have equity, a hard money lender could be the cash-out refinancing solution you need.
Cash-Out Refinance Rules
When doing a cash-out refinance, unless you are taking a home equity line of credit, most types of loans require you to first pay off the original mortgage with the new loan; whatever remains is yours to keep in cash. Conventional lenders have no restrictions about how to use the money if you are refinancing your primary home, so you can use the cash from your refinance in any way that you want.
Although there are no rules about how you spend the money, many people use cash-out refinancing to invest in something that will generate a return such as property improvements, an investment property purchase, or a business capital infusion. If you work with a hard money lender, they might want to know how you intend to use the funds so they can assess the risk of the refinance and to make sure they're compliant with lending regulations.
Cash-Out Refinance Pros and Cons
In some cases, the interest rate on the new loan could be lower than the original mortgage or a home equity line of credit, which is an additional benefit of going through the process. For investment properties, interest rates for refinancing are typically higher than refinancing a primary home. Interest rates are also higher than a refinance that doesn’t allow you to get cash back. This could be worth it, especially if you are able to generate ROI with the cash or can save on interest by paying down other debts.
You will have to pay closing costs on the loan, so factor this in when determining how much cash you’ll be able to get. It may be possible to roll these costs into the loan amount, but this will increase your overall interest costs. Depending on how you use the cash, you may also be eligible for mortgage interest tax deduction.
Get Started with Socotra Capital
Whether you’re a first-time real estate investor or an experienced flipper or rental property owner, Socotra Capital is here to help you understand all of the possible ways you can use your equity. We understand that the real estate market moves fast, which is why we help you close in a matter of days and not the months required for a conventional loan. If you have equity and want to learn more about your options, read The Borrower's Guide: Fix and Flip Hard Money Loans.