Is cash-out refinance investment property the best funding solution for you? And, how does it work? This guide details everything you need to know about the cash-out refinance strategy.
When property values soar, tapping onto your investment property equity is an excellent way of getting the funds you want for your projects. Whether you are looking to grow your investment portfolio, clear some high-interest loans, or do some home improvements, this might be your best way out.
Through cash-out refinance investment property loans, you can leverage your home or property’s equity to easily get the funds you need. However, since investment properties are considered riskier, interest rates on these loans tend to be much higher. Also, there are several other requirements you must fulfill before getting the loan.
But, before we get into these requirements, let’s first understand what cash-out refinance investment property is and how it works.
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What is Cash-Out Refinance Investment Property Loan?
This is the ability to get financing by tapping into your investment property’s equity. Here, a property owner applies for a new mortgage, more than they currently owe, receiving the difference to fund their projects.
This is usually possible when real estate prices go up significantly. When the property’s value raises, the difference between the actual value of your property and the remaining mortgage also increases. Lenders allow real estate investors to tap on this difference (equity) to acquire a loan.
For instance, if the remaining mortgage on your property is $100,000, you can get a cash-out refinancing of $180,000 and get $80,000 as cashback. However, this will depend on the current value of the property and the prevailing mortgage rates.
Cash-out refinancing is available for both investment and residential properties. In fact, it works the same way, except that investment properties tend to attract higher interest rates as they are considered to carry more risk. Also, several other rules are stricter when cash-out refinancing an investment property than when refinancing a primary residence property.
Cash-Out Refinance Requirements
Unlike primary residence properties, investment properties are categorized as “non-owner-occupied.” This means that lenders will be taking on more risk by offering cash-out refinance investment property loans. Subsequently, they impose stricter measures to help reduce their risk.
The main requirements include:
Higher Credit Score
As I mentioned earlier, a cash-out refinance investment property loan is harder to get than a conventional loan. For starters, the minimum credit score that FICO allows for such kinds of loans is 620. And some lenders will set their minimum credit score requirement as high as 700.
This means that if your credit score is below this, you might want to rethink this type of funding. However, some extensive research might help you get better rates. Some lenders might be willing to offer lower credit score requirements than others.
Also, there are several ways of improving your credit score in just a few days. Use these tips to get a better score and obtain that financing.
With cash-out refinance on investment property, investors also require sufficient cash reserves. This should exclude the money they receive from the refinancing transaction.
These reserves are determined by the investor’s new mortgage payments, coupled with whether or not they own other properties. When seeking such a loan, the investor may be required to have reserves amounting to anything between zero and 12 months’ worth of the property’s future payments. The amount should be reserved in a verifiable asset account.
In addition, the lender might require you to hold a cash reserve equaling between 2 and 6% of any loan balances taken on other properties, besides the one you seek cash-out refinancing and the primary residence.
Maximum LTV (loan-to-value ratio)
You need an LTV of between 70% and 75% for a cash-out refinance investment property loan. An LTV is a measure of the current mortgage balance against your property’s value or its equity. It helps to determine the amount you can borrow against your investment property’s equity.
Most lenders will set a maximum equity limit that you can borrow against to increase your ability to repay the new mortgage. This ratio may be affected by the number of units your investment property has. For instance, both Fannie Mae and its brother organization, Freddie Mac (Federal Home Loan Mortgage Corporation), determine this ratio requirement as follows:
For investors with a single rental unit, the LTV is set at 75%, while those properties with 2-4 units are set at 70%. So, the number of rental units on your investment property plays a major role in determining how much money you get.
Some lenders will use Fannie Mae standards, while others prefer Freddie Mac ones. There are also others who might accept both standards. For this reason, ensure you do a thorough research of your own.
Note: Some exceptions might apply if you got the property through a divorce, separation, or inheritance. Here, the LTV is capped at 70% despite the number of units on the property. Also, for VA cash-out refinance, you can get up to 100% LTV, which allows you to tap into your property’s entire equity.
While this is an excellent way of financing your major projects or upgrading your investment portfolio, the waiting period requirement might negatively affect your eligibility.
For instance, before seeking cash-out refinance on a property, you must have owned this property for at least 6 months. This means that you cannot get any funds through cash-out refinancing on an investment property below this period.
Best Cash-Out Refinance Lenders
Now that we know what cash-out refinance investment property is and how it works, where can you get it? Which are the best lenders for these kinds of loans? Well, here are some of our featured lenders that can help make the process quite easy.
If you are looking for the fastest cash-out refinance lenders, NewSilver is an excellent option. They offer short-term refinancing with cash-out options, plus the following advantages:
- Better interest rates, between 6.99 and 9.5%
- Loan limits of up to $3,000,000
- An origination fee of as low as 1.875%
- Online loan approval
Here, you also don’t need to wait for weeks or months to close. Just 5 business days are enough.
This is another great choice when it comes to cash-out refinance investment property. And, it’s not without some valid reasons.
First, it offers some of the lowest cash-out refinance rates in the market. Second, it also offers some of the lowest loan closing costs.
The platform also uses slick technologies, which make the whole online application and approval process quite easy and fast.
Movement Mortgage enjoys a wide network of branches, around 650, spanning across the 50 states of the US.
If you don’t have the time to do some thorough research on the best cash-out refinance investment property lenders, LendingTree has a solution. While it’s not the actual lender, the platform connects interested borrowers with the best lenders in the market.
LendingTree provides the investors with the best deals for loan interests and repayment periods. Within a few minutes, you’ll have received the best offers from several lenders, making loan comparison and shopping quite easy. The platform gives you an upper hand when it comes to cash-out refinancing investment property.
Also, if you are looking for the best cash-out refinance calculator, LendingTree offers just what you need. Use their mortgage refinance calculator to decide whether taking that cash-out refinancing mortgage is the best option.
Cash-Out Refinance Investment Property Alternatives
Sometimes, you just can’t wait until your property accumulates enough equity to access a cash-out refinance. When this is the case, what are your options? How can you still access enough money to finance your portfolio upgrade or home renovation project?
A personal loan is an excellent alternative. Here, you can get a loan from a lender to use for whichever purpose you choose. Generally, personal loans come with fixed interest rates, a fixed repayment period, and a repayment schedule.
Unlike cash-out refinance investment property loans, personal loans usually don’t require collateral. Since the loan terms and interests are usually fixed, an investor can choose a loan amount with terms that fit his/her budget.
As with cash-out refinance on investment property, personal loans can be used for any purpose, including offsetting high-interest debts, home improvements, portfolio upgrades, etc. One of the best platforms to get these kinds of loans is the LendingClub. You can get even up to $40,000 in unsecured loans.
Cash-Out Refinance Texas
In Texas, the law allows homeowners and real estate investors to tap onto their property’s equity through cash-out refinance loans. But, while primary residence homeowners can benefit from these loans only once a year, investment property investors can do so more frequently.
Investors here take out even up to 80% of their home equity, as per the amended laws. The new mortgage is designed to offset the existing mortgage and create a new loan.
Eligibility requirements for cash-out refinance in Texas include:
- A credit score of at least 660
- Homeowners can only tap on their primary home’s equity once a year, while they can do so more often for investment properties.
- At least 20% of the home’s equity should be left at all times
- Most lenders require a DTI (debt-to-income) ratio of not more than 36%
Cash-Out Refinance Illinois
Generally, home cash-out refinancing rates in Illinois are relatively lower than in home equity loans. However, closing costs tend to be higher, as you’ll be refinancing the entire mortgage.
In Illinois, cash-out refinance investment property works best when applying a large amount of money or if the refinance mortgage rates are low.
Some of the cash-out refinance requirements in Illinois include:
- At least 20% equity on the property
- A credit score of 620 or higher
- A fresh home appraisal to determine its current value
- Maximum DTI (debt-to-income ratio) of 43%
- Maximum LTV ratio of 80%
- Proof of income or employment
Cash-Out Refinance Florida
In Florida, the more equity you have on your property, the more money you can get via cash-out refinance investment property.
The minimum equity necessary for cash-out refinancing in Florida is 20%. Also, lenders allow investors to cash out, only up to 80% of that equity’s value. And, while some lenders might allow a cash-out of up to 90%, it’s rare.
Note: If you borrow more than 80% of your investment property’s value, you’ll have to keep paying PMI (private mortgage insurance) until your property’s equity exceeds 20% again.
The advantage of applying for cash-out refinance in Florida is that you have a chance to get lower interest rates in case the market allows.
Cash-Out Refinance California
California is one state where cash-out refinance loans are similar to conventional refinance ones. For both types of loans, the most basic requirements are as follows:
- A credit score of at least 620
- Max DTI ratio of 45%
- Max LTV (loan-to-value) ratio of 80%
Some lenders will also require homeowners to provide proof of liquid asset reserves. However, with each lender, loan scenarios vary.
Generally, cash-out refinance investment property loan rates in California range from 0.125% to 0.375%, which is relatively higher than on non-cash-out ones. This is because of higher default rates in cash-out refinance loans, prompting lenders to charge more.
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