You can also use cash refinance funds as a down payment on a new investment property or even buy the property outright. This expands your real estate portfolio using the profits from your first investment. 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, Closing costs can range from 2% to 5% of the loan amount.
Lenders require the borrower to withhold a certain amount of principal with a cash-out refinance, similar to making a down payment on a home. A cash-out refinance to purchase investment property, on the other hand, works a little differently than for a permanent home, in which case a home equity line of credit (HELOC) would be a better alternative. If you want to keep the current property as your primary residence, you can use the money as a deposit in another home or buy a new home entirely as soon as the cash out refinance is completed. From more flexible terms and interest rates to tax advantages and more, investors should consider this strategy if they want to build wealth with real estate.
So when is a cash out refinance a good strategy to finance your investments and when is it a mistake? Let's take a look at the things to consider. A cash-out refinance is a popular strategy used by real estate investors to convert accumulated capital into cash to purchase rental property. If you have never considered a cash-out refinance of an investment property, look at the benefits listed above. When mortgage interest rates are low or the stock market is booming, using your home equity to finance an investment could be lucrative.
It's also worth noting that a minimum credit score is required when applying for a cash-out refinance loan. 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. Unlike business loans, personal loans, and hard money loans, the interest rate on a cash-out refinance loan must be comparable to the original interest rate offered on your home. HELOC loans can also be more difficult to obtain on investment property, although investors also have the option of using their primary residence.
Whether you're ready to diversify, earn a passive income, or enjoy more quality time with your family, an investment property or a second home could help you achieve your goals. If you plan to use a cashout refinance to finance your rehabilitation project, you should wait for a waiting period to do so. From favorable interest rates to approval speeds, keep reading for reasons to use a cashout refinance.