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

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

After tapping the home equity in your rental unit, you can use the funds to make improvements, scale up your portfolio, or pay off high-interest debts.

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When home values soar, real estate investors may want to cash out the equity they’ve built up. Cash-out refinancing on investment properties can help you pay for home improvements, grow your portfolio, or handle personal expenses. But you’ll need to meet stricter eligibility requirements.

Here’s what you need to qualify for this type of refinance loan along with the best practices for using one:

What is a cash-out refinance?

With a cash-out refinance, a homeowner takes out a new mortgage for more than they owe and receives the difference in cash (minus closing costs).

Because investment properties carry more risk, the interest rate on an investment property refinance might be 0.5% to 0.75% higher than a regular refinance – and rates may increase further if you borrow cash in the process.

Cash-out refinances also take time to complete – usually 30 days, on average, but it can take longer in hotter markets.

Credible can help you get started with your cash-out refinance. You can compare our partner lenders and get prequalified rates in just a few minutes.

  • Compare lenders
  • Get cash out to pay off high-interest debt
  • Prequalify in just 3 minutes

Why get a cash-out refinance on your investment property?

At the end of 2020, about 46 million homeowners had an average of $158,000 in “tappable” home equity, according to a report by Black Knight. If you’re seeing appreciation, you might want to put your home equity to work by borrowing cash and expanding your portfolio.

Make home improvements

A cash-out refinance could provide the funds for much-needed maintenance and repairs on your investment property. Or, you might be planning some home improvements to increase the value of your rental home.

Regardless of what you do, both types of projects may allow you to raise the rent and potentially increase your monthly earnings. And if the property appreciates even more, you could recoup the costs of the cash-out refi by selling later.

Buy another rental property

You can also use cash-out refinance funds as a down payment on a new investment property or even buy the property outright. This expands your real estate portfolio using gains from your first investment.

Pay down personal debt

Many homeowners use money from a cash-out refinance to pay down higher-interest debt, like credit cards. You’ll still have to repay the money from the refinance, but you may save substantially on the costs of interest overall.

Stash away emergency cash

Financial experts typically recommend keeping three to six months’ worth of expenses in savings – though you may want to save more if you own rental units. This can help you keep up with your mortgages, pay your bills, and otherwise maintain your lifestyle in case of financial emergencies.

Tapping your equity at a low rate, when you still qualify for the loan, could help you start this fund. Just be sure you can keep up with the higher payments from https://signaturetitleloans.com/payday-loans-ne/ a cash-out refinance.

Requirements for investment property cash-out refinancing

Investment properties are “non-owner-occupied,” which means the lender takes on more risk when providing a cash-out refinance. That’s why lender requirements are slightly stricter than they would be if you were refinancing your primary residence.