A cash-out refinance loan is becoming an increasingly popular refinancing choice among homeowners, but it is also a preferred refinance option for property investors. Let’s take a closer look at what cash refinance loans are and why property investors love them.
So let’s get started.
What is a Cash-Out Refinance Loan?
A cash-out refinance loan is a loan refinancing option that allows you to replace your old loan with a new loan, offering a larger amount of cash than you owed on your previous loan. Cash-out refinance is, therefore, a means for borrowers to get access to cash that they can use for their existing loan repayment and for other purposes, including home improvement, debt consolidation, or paying for their child’s education.
Refinancing is generally a popular process that allows the replacement of an old mortgage with a new one and typically changes the terms of the loan to make it more favorable for the borrower. Through refinancing, you can decrease your monthly mortgage payments by negotiating a lower interest rate or changing the loan term period. However, a cash-out refinance loan is different as it gives you access to potential cash that you can put to use depending upon your needs.
How Cash-Out Refinance Works With Property Investment
Cash-out refinances loans work the same way for property investment as they do for your primary residence. You can opt for a new loan with a greater amount than you currently owe and use it to pay off your existing loan for the property. You can receive the difference in amount as cash in hand that you can use for any purpose you want.
Some of the ways you can use excess cash from property investment include the purchase of new property and the construction of your existing property to create more opportunities for rental income. Moreover, you can also use the cash in hand to expand your investment portfolio not just in property but also in stocks. Furthermore, you can use the case to consolidate your debt or to pay off your existing loans, such as credit card debt and personal loans.
While cash-out refinances works the same way for property investors as it does for homebuyers seeking a primary residence, there are a few things that you should keep in mind when using a cash-out refinance loan for property investment.
- The requirements for cash-out refinance for property investors are slightly more strict, and you need to have a good credit history and should have more than 25% equity to cash-out ratio,
- Cash-out refinance loans for property investors may require you to pay a higher interest rate on your investment property cash-out refinance.
Though there are different requirements for cash-out refinance loans for property investors, it is one of the most favorable times to seek a loan as mortgage rates are historically low. Therefore, many property investors can still use the cash-out refinance option on their investment properties and can still get an affordable rate on their new mortgage.
Why Do Property Investors Love Cash-Out Refinance Loans?
Now that you know what a cash-out refinance loan is and how it works for property investors, let’s look at some of the reasons why property investors love cash-out refinance loans.
Cash-out Refinance Loans Allow for Rapid Growth of Real Estate Wealth
Cash-out refinance makes a great choice for property investors because it gives access to cash in hand to investors, which they can use according to their choice. Property investors can use the excess cash to invest in other income-generating properties, which allows for the rapid growth of the real estate wealth base.
Cash-Out Refinance Allows for Quick and Easy Development
Property investors who are developers love cash-out refinance because they get access to cash in hand, which they can use for financing their projects more quickly and conveniently while diversifying their investment.
Cash-Out Refinance Offers Appreciation of Property Value
Over the last few years, the median home value of a single-family home in the U.S. has increased by over 57%, and previous statistics reveal that the housing market experiences a growth of 5.3% annually. Given this rise in the prices of homes, if you originally purchased a 1,100 square foot home at the then median price of $150,000, your rental property is now potentially worth $235 500, which means that you have accumulated equity on your property from an appreciation of around $85,500. The gain doesn’t take into account the reduction in the principal balance on your initial loan after five years of payments.
While the appreciation of the property value is an incentive for property investors, the access to cash in hand that is earned through appreciation remains the primary motivation for property investors to opt for cash-out refinance loans.
Is Cash-Out Refinance Worth It?
While cash-out refinance is a popular choice among property investors, whether or not it is worth it depends upon how much equity you have in your property. When the equity barely exceeds the minimum requirement, you shouldn’t probably opt for cash-out refinance. However, if your equity exceeds the minimum requirement by a large margin that was going for cash-out refinance is your best bet.