A cash-out refinance is a way to take advantage of your investment property’s equity without having to sell. You can use the proceeds however you see fit, whether it’s for buying another property to expand your rental portfolio or using it for personal expenses.
Find out how a cash-out refinance for an investment property works, eligibility requirements, and pros and cons to consider.
- What is a cash-out refinance?
- Requirements for cash-out refinancing
- Pros of a cash-out refinance for investing
- Cons of cash-out refinancing for this purpose
- Frequently asked questions
What is a cash-out refinance?
A cash-out refinance allows you to access equity in a property you own, including primary residences and investment properties. You take out a new loan for a larger amount than your current mortgage balance. The new loan pays off the existing mortgage and you get the remaining cash to use for other purposes.
Getting a new loan for your property can also help you lock in a lower interest rate or adjust the length of your loan term. But just like any other mortgage, a refinance does require you to pay some closing costs.
A cash-out refinance typically takes at least a month to complete, from application to closing. But this timeline can vary depending on where you live. For instance, more active real estate markets may require more time for the cash-out refinance lender and appraiser to complete the transaction.
Requirements for investment property cash-out refinancing
You’ll likely notice stricter lender requirements when doing a cash-out refinance on a rental property than a refinance on a primary residence. This is because the property is “non-owner occupied,” which lenders consider more of a risk.
Here are the eligibility requirements to expect from most of the best cash-out refinance lenders:
| Requirement | Details |
|---|---|
| Loan-to-value (LTV) ratio | Up to 75% |
| Min. credit score | 580 to 620 (varies by lender and loan type) |
| Cash reserves | Up to 12 months of mortgage payments |
| Waiting period after initial purchase | 6 months |
Loan-to-value ratio
Lenders won’t allow you to take out all the equity in the property because they want you to retain a financial stake in the home. The LTV ratio refers to the amount of equity you can extract during a cash-out refinance.
The maximum allowed LTV depends on the type of investment property:
- One-unit properties or single-family homes: Maximum 75% LTV
- Two- to four-unit properties: Maximum 70% LTV
The LTV will likely be lower if you opt for an adjustable rate mortgage. An adjustable rate mortgage is a loan with an interest rate that fluctuates depending on the market. This means your interest payments can change over time and affect the cost of your monthly loan payments.
Here are the LTV requirements for a cash-out refinance with an adjustable rate mortgage:
- One-unit properties or single-family homes: Maximum 65% LTV
- Two- to four-unit properties: Maximum 60% LTV
Credit score
You’ll likely need decent credit in order to qualify for a cash-out refinance on your investment property. Credit requirements for a cash-out refinance vary depending on the lender and the type of loan you’re refinancing.
Here are the minimum credit requirements you can expect for conventional, FHA, and VA cash-out refinances:
- Conventional loan: 620 min. credit score
- FHA loan: 580 min. credit score
- VA loans: 580 min. credit score
Cash reserves
Lenders want to know that you’ll be able to pay for your housing expenses after the mortgage closes — this is where cash reserves come in handy. Cash reserves are savings measured by the number of months of costs you’d be able to cover.
Expect to need as much as 12 months of mortgage payments in cash reserves. For example, if your new mortgage is $250,000 at a 6.00% APR, your monthly loan payment would be $1,499. This means you’d need about $18,000 in cash reserves.
In some cases, you may be able to qualify to keep up to 6% of your unpaid loan balance as a cash reserve instead.
Waiting period after initial purchase
New investors may not qualify for a cash-out refinance right away. Typically, you need to wait 60 days after purchasing the property to refinance. However, there is an exception if you paid for the property in an all-cash deal, as long as the source of cash is documented.
Pros of cash-out refinancing for an investment property
There are several benefits of using a cash-out refinance for your investment property, including:
- Expand your real estate portfolio: Use the funds as a down payment toward buying another investment property, which can expand your asset portfolio and rental income.
- Get better terms on your next property: If you put the money from your cash-out refinance toward a larger down payment on a new rental property, it might help you qualify for lower rates and more favorable terms.
- Better interest rate: Depending on the current rate market and improvements to your credit score, a cash-out refinance could help you qualify for a lower interest rate than you’re currently paying.
- Extend your repayment term: You can lower your monthly mortgage payment by extending the repayment term with a cash-out refi. For instance, you could restart your mortgage at 30 years, which would spread out the loan balance and minimize your payments. Just keep in mind that you’ll pay more in interest over time.
Cons of cash-out refinancing for an investment property
Before you apply for a cash-out refinance for a property (or to pay off debt, among other purposes), here are some drawbacks to keep in mind:
- Closing costs: All home loans come with closing costs, including lender fees and the appraisal. These costs typically range from 2% to 5% of your loan amount. Make sure your long-term benefits outweigh these additional charges.
- More interest over time: Depending on your credit score and the state of the real estate market, you may not actually qualify for a lower interest rate. Even if your rate is slightly lower, you’ll pay more over time if you extend your loan term.
- Lower net worth: Taking cash out of your investment property lowers your equity and your net worth. If property values drop, you could end up owing more than the home is worth.
- Possibility of foreclosure: Getting cash from your investment property may seem like low-cost financing, but remember that the borrowed funds are secured by the property. This means that if you fall behind on payments, you run the risk of losing the home to foreclosure.
Frequently asked questions
How much can you cash-out refinance on an investment property?
It depends on the size of the rental unit. Typically, the maximum is 75% LTV for single family homes and 70% LTV for multi-family properties with up to four units.
Is a cash-out refinance on investment property taxable?
No, the proceeds from a cash-out refinance are considered a home loan, even on an investment property. That means you don’t have to count the money as taxable income or capital gains. And if you use the money for home improvements or to buy a new property, you may even qualify for a tax deduction. Consult a tax expert for details on your specific situation.
Does it make sense to refinance an investment property?
This largely depends on your goals and the new mortgage terms. For example, if you want to use the equity to purchase another investment property, it could be a good idea to use funds from an existing rental’s equity. But if you want to lower your payments with a cash-out refinance, you’ll need to review all the financial implications to make sure the numbers make sense.