Investment Cash-Out Refinance

The 5 Steps of a Cash-Out Refinance:

1. Determine Amount of Equity

The first step as investors is to determine the amount of equity you have in a potential cash-out refinance. You can do this by subtracting the remaining mortgage balance from the FMV of the property. Companies like Zillow have accurate and free information, and you can also pay for your own independent appraisal.

2. Identify Mortgage Lender

Once you’ve established that you have at least 30 percent to 40 percent of equity, the next step is to identify a Fannie Mae-approved mortgage lender to help you with your cash-out refi. Fannie Mae has a list of affordable lenders, and you can also engage a national lender like Visio Lending or something similar.

3. Apply for Prequalification

Regardless of the lender you choose, the application process for a cash-out refinance is typically the same. You’ll first apply for prequalification, where a lender will ask for basic information and give you a general loan estimate. This should give you a general understanding of how much equity you can extract from your property. Prequalification takes minutes and gives you a maximum loan amount possible.

4. Finalize Pre-approval

From there, lenders will conduct an appraisal and ask for more investor information, such as two recent pay stubs, a list of total assets and debts. Additionally, if it’s an investment property being refinanced, investors have to show six months cash of reserves, two years personal tax returns, and a current lease agreement. The information in this stage helps lenders determine the specific loan term, rates, and costs offered for the cash-out refi.

5. Receive Funding

The final step is to receive the loan that was finalized during pre-approval. This typically takes three days after the application is fully approved. During this time, the funds from the loan are wired directly to the borrowers’ bank account and the borrowers are responsible for paying off the old mortgage and using the remaining funds for other investments.


How a Cash-out Refinance Works

A cash-out refinance happens when investors refinance a home in order to extract equity from the property. They take out a new loan to pay off their existing mortgage and, if the new loan is larger than the previous loan, they can use the difference to use as a rehab budget or to invest in other properties. A cash-out refinance essentially lets you unlock the cash in an illiquid investment.

A cash-out refinance, also known as a “cash-out refi,” can finance up to 75 percent of a property’s current fair market value (FMV), known as the loan-to-value (LTV) ratio. This means you need at least 30 percent equity in a property for a cash-out refinance to make sense. For example, a house worth $150,000 can be refinanced with a loan up to $112,500, derived as:

($150,000 fair market value) x (0.75 LTV) = $112,500 maximum refinance amount

If your existing mortgage balance is at or higher than $112,500, then a cash-out refi would only make sense if you wanted to lock in a lower interest rate. Investors with existing mortgage balances below $112,500, however, can use the new loan to pay off the existing mortgage. For example, if your current loan’s principal balance is $100,000 and you refinance with a $112,500 loan, you would have $12,500 left over to invest elsewhere.

Therefore, the three important components of a cash-out refinance are:

  1. The existing mortgage balance
  2. The property’s fair market value
  3. The new loan amount

Typically, investors apply for a cash-out refi and, if accepted, the lender and the title company will handle paying off the existing loan via a wire transfer. The borrowers then receive their excess funds in “cash,” which is usually in the form of a wire to their bank or a certified check from the title company.

If you’re looking for a new lender to help you with your cash-out refinance, look no further than Visio Lending. It is an online lender that specializes in investment property loans, both short- and long-term. Prequalification takes minutes, so check the company out today.

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The People a Cash-out Refinance is Right For

A cash-out refinance is typically used by investors who have at least 30 percent to 40 percent equity in an existing investment property. These investors use a cash-out refinance to extract their equity and purchase either a new investment property or renovate an existing investment property. The new loan amount must be higher the old mortgage balance and the difference is pocketed in cash.

Specifically, a cash-out refinance is right for three types of investors:

  1. Short-term fix-and-flippers looking to purchase, renovate, and flip a new investment property.
  2. Long-term buy-and-hold investors looking to put a down payment on a new property or purchase it with all cash.
  3. Long-term buy-and-hold investors looking to renovate an existing rental property.

There are no restrictions on how investors use the cash from a cash-out refinance, so that’s why it’s right for different investors. Therefore, the money earned on a cash-out refi can be used to renovate an existing long-term rental property in an attempt to increase its value and its rental income.

It can also be used to finance a short-term fix-and-flip project as well as a long-term rental property. The funds can also make it easier to compete with all-cash buyers for foreclosures or properties sold at real estate auctions. Regardless of intention, investors need an existing property in order to execute a cash-out refi.

If you’re looking for a cash-out refinance on one or multiple properties, then Visio Lending could be a good fit. It has portfolio loans that allow you to refinance on a single property or several properties. You can get up to $2 million with a 30-year term and competitive rates for prime borrowers.

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Cash-out Refinance Rates, Terms & Qualifications

The new loan obtained in a cash-out refinance is typically similar to the old mortgage. The differences are that the new loan will usually have a lower interest rate and LTV ratio. You will still need to meet certain qualifications to qualify for the new loan, such as having a minimum 640 credit score.

Cash-out Refi Breakdown of Rates, Term & Qualifications

Cash-Out Refinance
Loan Amount Up to 75% Loan-to-Value (LTV)
Interest Rate 3.25% – 5%
Fees 0% – 3% Lender Fees
2% – 5% Closing Costs
Loan Term 15 – 30 Years
Time to Funding 30 – 45 Days
Qualifications 640 Minimum Credit Score
(Check your credit score for free here)
36% – 45% Debt-to-Income Ratio
0 – 6 Months Cash Reserves

Visio Lending is an online lender servicing real estate investors looking for a cash-out refinance. Prequalification only takes minutes, so check it out today for more information.

Visit Visio Lending

Cash-out Refinance Loan Amount

According to Fannie Mae, the maximum loan amount for a cash-out refinance is as follows:

  • LTV: 75 percent for a one-unit property
  • LTV: 70 percent for a two-to-four unit property

The maximum loan amount allowed on a cash-out refinance is regulated by Fannie Mae. Loan amounts are issued as a percentage of a property’s FMV, which is the LTV ratio. Furthermore, if a property was listed for sale during the last six months, Fannie Mae sets a maximum loan amount of 70 percent LTV, regardless of the number of units.

Cash-out Refinance Rates & Costs

Cash-out refinance rates & costs are typically:

  • Rates: 3.25 percent to 5 percent
  • Lender fees: 0 percent to 3 percent
  • Closing costs: 2 percent to 5 percent

One of the benefits of a cash-out refinance is that the interest rates on the new loan are typically lower than the interest rates on the old mortgage. Interest rates can be either fixed or variable and are typically lower than the 4 percent to 6 percent rates found on a traditional mortgage or the ~5 percent found on a home equity loan or line of credit.

However, since cash-out refis are unique, the loan origination fees charged are typically higher than with a traditional mortgage. What’s more, unlike a home equity loan, cash-out refis require that the borrowers pay additional closing costs. These costs and fees are usually taken directly out of the new loan, reducing the lump sum amount received by the borrowers.

Cash-out Refinance Loan Term

Generally, cash-out refinance loan terms are:

  • Term: 15 to 30 years
  • Approval time: 30 to 45 days
  • Funding: Within three days

This is important to note because a cash-out refinance will typically extend the loan term beyond the investors’ old mortgage. It’s common for investors with as little as eight to 10 years left on their existing mortgage to refinance to a 30-year loan.

Loans on a cash-out refinance generally take between 30 and 45 days for approval. Once approved, the cash is wired to the original lienholder to pay off the mortgage and the remainder is wired to the borrowers by a title or escrow company within three days. Sometimes, in lieu of a wire, the buyers will receive the funds in a certified check from the title company.

Cash-out Refinance Qualifications

The following minimum requirements for a cash-out refinance approval are:

  • Credit score: 640-plus (check your credit score for free here)
  • Debt-to-income ratio: 36 percent to 45 percent
  • Cash reserves: 0 to 6 months
  • Property status: Property can’t be listed for sale at the time of loan application
  • Seasoning: Property must be owned for at least six months
  • Equity: 30 percent to 40 percent in an existing property: owner-occupied primary residence or a non-owner-occupied investment property
  • Cash reserves: More than six months
  • Personal tax returns: Two years
  • Debt service coverage ratio (DSCR): 1.25 DSCR shown by providing a current lease

The lower the credit score, the higher the required debt-to-income ratio and higher the required cash reserves. The opposite is also true. This is because cash-out refis for investment properties are risky for lenders. Generally, the loan obtained through a cash-out refinance cannot be more than 75 percent of the property’s FMV, so that’s why 30 percent to 40 percent equity is needed.