Putting investment property equity to work
Cash-out refinancing for primary residence (owner-occupied) homes are gaining in popularity, but so are cash-out loans for investment properties or second homes.
While they were hard to come by just a few years ago, many lenders now offer investment property owners the chance to cash in on their non-owner-occupied homes’ equity.
Check your cash-out refinance interest rates. Start here (Jan 27th, 2024)
Cash-out refinance for investment properties
If you’re someone who generates income from rental properties, then a cash-out refinance could be a great strategy for you. Cash-out refinancing could help you grow your rental income, for instance, if the cash is for home improvements. Many cash-out refinance applicants lower their existing mortgage interest rate while taking cash out, improving their positive cash flow.
Here’s what you need to know about the cash-out refinance rules as they apply to investment properties, and if you’re a good candidate.
Do you have equity in your rental property?
As with most cash-out refinancing programs, the more home equity you have, the better position you’ll be in to qualify and reap the benefits of a new loan.
For a non-owner-occupied refinance, most lenders will loan up to 75 percent of the appraised value of the home, the maximum set by Fannie Mae. In rare instances, you could find lenders that will go up to 80 percent, but these are probably the bank’s proprietary mortgage loan programs for which they charge a higher rate.
In other words, in order to make a cash-out refinance loan worth your while, you’ll need to have a certain amount of equity. Rental properties with 30 to 40 percent equity are the best candidates for cash out. Homeowners who purchased years ago might even drop their rate while taking cash out.
Check your cash-out refinance interest rates. Start here (Jan 27th, 2024)
Non-owner-occupied cash-out refi rules
Here are some recent eligibility requirements and guidelines for cash-out refinances on rental properties as set by Fannie Mae:
- The maximum loan-to-value ratio is 75% for 1-unit properties and 70% for 2- to 4-unit properties. These maximums are lowered by 10% for adjustable-rate mortgages.
- If the property was listed for sale in the last six months, the maximum LTV is 70%.
- The property must not be listed for sale at the time of home loan application.
- The property is not eligible for a cash-out refinance if it was purchased within the last six months. There is an exception for properties that meet the Delayed Financing guidelines.
Delayed Financing Rule: A rental property that was purchased within the last six months is eligible for a cash-out refinance if:
- The new loan amount is no more than the original purchase price plus closing costs.
- No mortgage financing was used for the home purchase unless the financing was on another property.
- The transaction was arms-length, meaning the seller did not have a pre-existing relationship nor financial interest in the sale besides the sale itself.
- The buyer has a final Closing Disclosure (final settlement statement) showing the purchase price and other details of the transaction.
Non-owner occupied cash-out refinances: Best for above-average applicants
Cash-out loans are risky business for lenders, especially in the case of those who are not living in the homes they are refinancing. That’s why qualifications are rigorous, and you can expect more paperwork than you would from an owner-occupied or no cash-out refinance.
For example, candidates must have a great credit score and 6 months’ worth of assets to handle the current mortgages on their rental and primary residences.
For qualifying borrowers, a cash-out refinance can allow you to turn your home value into cash without a second mortgage like a home equity loan or a home equity line of credit (HELOC). The interest rates on a cash-out refinance can be far more affordable than the rates associated with credit cards or personal loans.
Applicants will also have to present tax information, rental lease agreements, property value, and other property income information. Finally, if you already have more than four financed properties, some lenders may not accept your loan.
Check your investment property refinance rates. Start here (Jan 27th, 2024)
Is a cash-out refinance right for your investment property?
If you think you have ample equity, meet borrower requirements, and will benefit from a lower interest rate, there are just a few more things to consider before you move forward with cash-out refinancing.
For starters, work out how much your mortgage payment will increase, if any, by adding principal to your existing loan balance. Will your rental income be able to cover the increase?
Also, consider whether you will purchase more rental properties. Taking on additional debt could shift your debt-to-income ratio (DTI) in a way that affects your eligibility for future loans.
Also, because it will take time to see an income return on your refinancing, be sure that your cash-out loan will help you in the long run, not just to have some cash in the short term.
You also need to carefully go over the terms of the loan to be sure it makes sense for your investment goals. For example, it will now take longer to pay off the mortgage on your property.
Different lenders will have varied loan terms for non-owner-occupied refinances, including adjustable-rate mortgages versus fixed-rate. If you opt for an adjustable-rate mortgage, you have to be very confident that you will be able to handle fluctuations that may arise. This is why most property owners choose a fixed-rate mortgage when real estate investing.
Check your investment property refinance rates. Start here (Jan 27th, 2024)
Cash-out refinance FAQ
Can I get a cash-out refinance with an FHA loan or a VA loan?
Both the Federal Housing Administration (FHA) and Veterans Affairs (VA) loan programs offer cash-out refinance programs. However, neither program is intended to be used to purchase or refinance a second home or investment property.
What is the max LTV for investment property cash-out refinance?
Most cash-out loans for investment properties have a maximum LTV ratio of 70-75%, which will allow you to access between 25-30% of the home’s equity in cash.
What is the maximum loan-to-value ratio for a one-unit investment property?
The maximum LTV ratio for a one-unit property is 75%.
Can I get a cash-out refinance for an investment property?
Yes, there are refinance programs that will allow you to convert the equity you have in a second home or investment property to cash.
Where to apply for a rental property cash-out refinance
Once you factor all of the above into your decision, you may find that a cash-out refinance on your investment property can help you buy more rental homes or make improvements on existing properties.
The key with this option — as with any refinancing — is the new mortgage should either lower your monthly payments right away or put more cash flow into your pocket over time. If a non-owner-occupied cash-out refinance has one of those outcomes, then you should speak with a lender who specializes in these loans.
Most of today’s lenders offer cash-out refinances on rental properties at similar terms. You can get started on your application now. A loan officer can pre-qualify you and give you a rate and payment quote, which is the first step to making sure this type of mortgage refinance is the right move.
Check your cash-out refinance interest rates. Start here (Jan 27th, 2024)
As a seasoned real estate investor and financial advisor specializing in property investment strategies, I bring a wealth of firsthand expertise and in-depth knowledge to the table. Over the years, I've navigated various facets of the real estate market, including cash-out refinancing for investment properties, to optimize returns and capitalize on opportunities.
Let's delve into the concepts and terms discussed in the provided article:
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Cash-Out Refinancing:
- This is a financial strategy wherein an investor refinances an existing mortgage, taking out a new loan that exceeds the current loan balance. The difference between the two amounts is received as cash, which can be used for various purposes such as home improvements, debt consolidation, or further investments.
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Owner-Occupied vs. Non-Owner-Occupied Properties:
- Owner-occupied properties are homes where the owner resides, while non-owner-occupied properties, often referred to as investment properties, are properties primarily used to generate rental income.
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Loan-to-Value Ratio (LTV):
- LTV is a crucial metric in mortgage lending that expresses the ratio of the loan amount to the appraised value of the property. It's a key determinant in assessing risk for lenders. The lower the LTV, the less risk for the lender.
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Equity:
- Equity represents the difference between the current market value of a property and the outstanding balance on any loans secured by the property. It's an important factor in determining eligibility for cash-out refinancing.
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Delayed Financing Rule:
- This rule allows investors to conduct a cash-out refinance shortly after purchasing a property, provided certain conditions are met, such as ensuring the transaction was arms-length and no mortgage financing was initially used for the property purchase.
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Debt-to-Income Ratio (DTI):
- DTI is a financial metric used by lenders to assess an individual's ability to manage monthly payments and repay debts. It's calculated by dividing total monthly debt payments by gross monthly income.
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Fixed-Rate vs. Adjustable-Rate Mortgages:
- These are two common types of mortgage loans. Fixed-rate mortgages have a stable interest rate throughout the loan term, providing predictability for borrowers. Adjustable-rate mortgages (ARMs) have interest rates that can fluctuate based on market conditions, potentially leading to changes in monthly payments.
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Federal Housing Administration (FHA) and Veterans Affairs (VA) Loans:
- These are government-backed mortgage programs that offer various benefits to qualifying individuals, but they typically have restrictions on the use of cash-out refinancing for investment properties.
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Loan Qualification and Application Process:
- Qualifying for a cash-out refinance involves meeting rigorous criteria, including credit score requirements, asset verification, income documentation, and property valuation. The application process involves thorough scrutiny and may require extensive paperwork.
By understanding these concepts and navigating the intricacies of cash-out refinancing for investment properties, investors can strategically leverage their property equity to optimize returns and achieve their financial goals.
