Investing in real estate can be a great way to build wealth and diversify your portfolio. One popular strategy used by investors is a cash-out refinance, which allows you to use the profits from your first investment to purchase a second home or investment property. However, there are some important things to consider before taking this route. A cash-out refinance is a loan that pays off your existing mortgage and replaces it with a new one.
The new loan includes the amount of the original loan plus any additional funds you wish to borrow. This extra money can be used for a variety of purposes, including buying an investment property. Keep in mind that using a cash-out refinance to purchase a second home or investment property will incur closing costs. These are the lender and third party fees that are paid at closing (loan origination fee, title search fees, attorney's fees, prepaid fees, etc.).
Closing costs can range from 2% to 5% of the loan amount. Lenders also require the borrower to withhold a certain amount of principal with a cash-out refinance, similar to making a down payment on a home. There are several advantages to using a cash-out refinance for an investment property. For starters, it offers more flexible terms and interest rates than other financing options such as business loans, personal loans, and hard money loans. Additionally, there are tax advantages associated with this strategy.
However, there are some drawbacks to consider as well. For example, refinancing to withdraw cash may not make business sense if the new mortgage interest rate is higher or if you don't want to restart the clock with another 30-year loan. A minimum credit score is also required when applying for a cash-out refinance loan. When deciding whether or not to use a cash-out refinance for an investment property, it's important to weigh the pros and cons carefully. If mortgage interest rates are low or the stock market is booming, using your home equity to finance an investment could be lucrative.
On the other hand, if you plan to use a cashout refinance to finance your rehabilitation project, you should wait for a waiting period to do so. Overall, using a cash-out refinance can be an effective way to finance an investment property or second home. From favorable interest rates to approval speeds, there are many benefits associated with this strategy. However, it's important to consider all of the potential drawbacks before making any decisions.