Buying an investment property may be a great way to invest your assets if you’re already a homeowner. You don’t necessarily have to spend more, only use the home equity on your existing property to finance your next vacation home. It may sound too good to be true, but all this and more is possible with cash-out refinance loans. In this article, we’ll break down the step-by-step process of cash-out refinances. Learn what makes you eligible for cash-out refinance loans and how to get started.
Best Time To Consider Cash-Out Refinance Loans
Cash-out refinance loans offer homeowners a means to pay for outstanding bills on their homes or elsewhere through their existing home equity. It allows you to convert the equity on an old property purchase into cash for funding expenses.
Timing is everything when making a financial decision, and cash-out refinancing is no exception. Suppose you want to pay off outstanding debts, participate in low-risk investment activities, or make commercial property purchases. Here are some instances where you may consider cash-out refinance loans.
Need for Cash
One of the best times for cash-out refinancing is when you need to boost your liquidity. You may have to make debt payments, or you’re considering making a large commercial property purchase, and you don’t have the funds to cover the cost.
Then, it may be good to consider cash-out refinancing loans as a lifeline for cash funding. The good thing about this loan is that it is secured in equity you have on your old purchase property, making it a more convenient and cheaper way to access cash.
Home Improvements and Repairs
It is a standard cash-out refinance example, typically among homeowners or estate developers. Your real estate asset is one of the best ways to get value for your money and ensure you never run broke. The best time for cash-out refinancing loans is when you make home improvements and repairs.
Depending on the state of the property, renovation costs can be overwhelming, except if you have some extra funding. Here’s where cash-out refinance loans come in because you wouldn’t have to spend out-of-pocket to renovate your home.
All you need is to use the value of your existing equity to take an additional loan and use the balance to fund your repairs. Utilizing this option for home repairs increases the value of your property, boosts your credit, and allows you to access even greater financing options.
Cash-out refinance loans offer Low-risk Investment Opportunities
Have you ever wished badly for extra cash so you can take advantage of a profitable investment venture? The answer may have been right before you all along.
Another cash-out refinance loan example is using the money from the loan to purchase real estate assets, such as commercial property for short-term rentals. You could also use the money to buy a property, make improvements, and return it to the market.
By recovering the value of your existing home equity, you can put the money into a low-risk investment account without any higher interest rates. Once you have access to these cash-out refinances, the options are endless.
Note however, that before you invest in any venture or asset, you need to pay attention to the cost-benefit ratio of the cash-out refinance loans. You should also consider the socioeconomic conditions and current policies surrounding that investment.
Cash-out Refinance Loans Checklist
Not everyone will qualify for cash-out refinance loans. Factors like your credit score, income, and the existing equity you have on an old purchase property will determine whether or not you will be considered for cash-out refinance loans. How does cash-out refinance loans work, and what makes you eligible? Find out with our checklist below.
Credit Score
Most traditional lenders are typically on the lookout for persons with a credit score of at least 620. However, having a higher credit score can help you secure better interest rates.
Debt-To-Income Ratio
Conventional lenders will consider individuals with a DTI of 50% or less. Your monthly debt payments, including the additional mortgage, must exceed 50% of your gross monthly income. This means lenders want to ensure you’re earning more revenue than what you’re paying off in debt.
Existing Home Equity
Suppose your home value has appreciated, or you’ve paid up a significant portion of your mortgage. In that case, you have most likely generated equity. Typically, lenders require you to have at least 20% of your home equity untouched.
Therefore, to be eligible for cash-out refinances, the value of your home must be above 20% in equity. You can save 20% of your equity and take out a cash out refinance on the remaining value.
Other Requirements To Determine The Value Of The Property
- Income documentation & Payment history: You must gather all your documents, such as receipts, bank statements, and other proof of payment for your ongoing mortgage. Without this proof of payment, chances are the moneylenders wouldn’t consider your application.
- Recent home appraisal: Some Moneylenders require that it must have been conducted within the last 90 days before application.
- Proof of Residence: FHA loans require homeowners to have been in the home for at least 12 months. Some moneylenders also require you to own the house for at least six months before qualifying for cash-out refinance loans.
Additionally, your records must show that you have made at least six consecutive payments on your original loan before you may be considered for any mortgage refinance. You also need to understand that these are the minimum requirements, and many lenders may have other considerations depending on the interest rates.
Dos & Don’ts of Cash-Out Refinance Loans
Cash out refinance loans allow you to take out a fresh mortgage with different terms from your existing one. You only need to use the value of your old purchase property to recover hard cash for other expenses. The best part is that there are no rules for using money. You get to decide what outstanding expenses you want to settle or choose any investment to help you get value for your money.
On the flip side, there are risks when using cash-out refinancing loans. Since there’s no limit on how to use your cash, you may be tempted by many flimsy expenses. A bad cash-out refinance example is using mobile phones for vacations and other luxuries.
It would help to have a game plan for investing and saving money in the long run. Few moneylenders will suggest low-risk investment options, while many may leave you to your own devices.
Therefore, you must have a proper financial plan before getting the loan. You must carefully weigh the pros and cons to determine what makes sense for your financial circumstances.
Cash-Out Refinance Benefits & Drawbacks
Cash-out refinances can be your lifeline during a low-income period. It allows you to consolidate debts, easily finance significant home improvements at low interest rates, and increase your home equity.
For instance, the interest rate on the new loan can be lower than the existing mortgage credit. You also have the added benefit of paying off your loans at a cheaper rate. However, knowing the cons is important before jumping into the refinancing pool.
The first thing to note is that cash-out refinancing isn’t available right away. There is usually a waiting period from your first mortgage until you can be underwritten for cash out refinances. It may take anywhere from 6 months to 12 months or more, depending on the type of loan.
Additionally, cash-out refinances mean adding more debt to your existing loan. Also, this becomes a challenge when you must make more returns to pay off these closing costs.
To avoid higher debt payments, you can invest in rentals and other high-yielding assets to help you pay off these closing costs.
Start Your Loan Journey With Capital Max
A Cash-out refinancing loan can be the best move for your financial goals if all the correct details are in place. But you want to consult a professional to help you break down the numbers before you rush into cash out refinances.
You need a reliable lender that isn’t just available for the loan but for the long-term success of their clients. At Capital Max, we focus on helping you build wealth and avoid mistakes when making commercial property purchase loans. We offer honest and practical financial solutions that will best suit your circumstances.