Real Estate Tips |5 min read

One of the Best Refinance Options: A Cash-Out Refinancing Loan

Of all the refinance options out there, the cash-out refinancing loan stands out as one of the best options for real estate investors. A cash-out refi on an investment property can open many doors for you, including access to better loan rates, enhanced credit scores, and deducted taxes. Learn more about this lending strategy that can save you money.

Main Takeaways

  • Cash-out refinancing loans turn your equity into actual cash by exchanging your old loan with a new one. The cash comes from the fee difference between the old and new loan.
  • You can usually gain up to 80% of your property’s value in upfront cash. Then, you can use the cash however you want.
  • These loans have various benefits, like tax deduction, reduced rates, and credit score-improving potential.

Table of Contents

What is a Cash-Out Refinancing Loan?

With a cash-out refinancing loan, your ownership stake, or equity, is transformed into ready-to-use money. Hard money lenders in Maryland like us do this by swapping your current loan for a brand-new, bigger loan.

Then, you obtain the cost differential between the first and the new loan upfront. This takes the form of an immediate lump-sum payment for personal use. You get to choose where the money goes.

An Example

If you initially had a property at $500,000 initial value and $100k in equity, a cash-out refinancing loan helps you take advantage of these numbers later.

If you take a cash-out refi on an investment property when the equity has ballooned to $200,000, you can still retain the same initial equity you had from the start.

You could be in this situation for numerous reasons. Perhaps the home’s value has increased over time to $600,000, or you paid off $100,000 of the loan to add equity. No matter the reason, you can take the equity back into your hands.

How Does a Cash-Out Refi on an Investment Property Work?

To complete a cash-out refi on an investment property, you swap your current loan for a wholly new one. Your trade will grant you lower interest rates and/or quicker loan terms. Most importantly, you will gain hands-on cash.

Your new loan will be bigger than before. This is because it bundles the old loan’s balance and the withdrawn equity-based cash for you to gradually pay off.

This loan procedure includes:

Calculating the Cash Amount You Require: You should consider the cash amount you truly need, not what you assume you may possibly want. It’s a good idea to put your cash to careful use, for significant costs you otherwise couldn’t shoulder alone.

Ensure You Qualify: Make sure your financial status, such as your credit score, meets your lender’s requirements. Every loan provider has unique approval qualifications.

Make Sure Your Lender’s Rate Works for You: If you can’t get a lower loan rate than your current loan, there’s no point. So, make sure that your refinance options will save you money.

How Much Money Can You Gain from a Cash-Out Refinancing Loan?

Depending on your property type, your cash-out refinancing loan provider could let you borrow up to 80% of the home’s value. Lenders generally want you to maintain 20% of your home equity.

Pros of Getting a Cash-Out Refinancing Loan

This refinancing loan has many lucrative advantages you should assess for the future. Here are the benefits below.

Lower Rates than Other Loans: Cash-out refinancing loans can have lower borrowing rates than other refinancing options. Also, they’re usually more affordable than personal loans, home equity loans, or credit cards.

Reduce Your Interest Rate: Borrowers often use cash-out refinancing loans for this specific reason. With these loans, you can reduce your loan rate and take out equity at the same time. Furthermore, even just one interest point can accumulate thousands of owed dollars throughout the refinancing loan term. So, if you can reduce that rate by even 1%, that can save you untold sums of money.

Credit-Improving Potential: Your credit utilization ratio could drop if you use your equity to consolidate your debt. In turn, this could boost your credit score.

Tax-Deductions: People who use these loans for home improvements are eligible for deducted loan interest on their federal tax returns.

What You Can Spend Your Newfound Funds On

You can use the cash from a cash-out refinancing loan on otherwise huge, untenable expenses. In fact, it can be one of the most cost-effective ways to pay for enormous expenditures, such as:

Home Improvement Projects: You could use this loan to renovate your home. Or, you could add an addition, like an attic or basement. Also, you could renovate another investment property to improve its value. Improvements don’t necessarily need to equate to grand renovations, either. They can refer to simple repairs needed to maintain a property.

New Property Investments: You could funnel money from cash-out refi loans on an investment property into even more properties. This way, you can contribute to your portfolio. To boot, you can add to your cash flow.

Consolidate High-Interest Debt: Because refinancing loan rates are often lower than other debt types, you can use cash-out refinancing options to pay off such debts. For example, if you are saddled with debt from multiple loans on multiple properties, you can take out cash from one healthy-equity property. Then, you can pay off your other properties’ loans. Next, you can pay back your remaining loan with a single, cheaper monthly payment. Furthermore, consolidating debt boosts your cash flow.

College Education: Your cash-out refi loan rate could well be lower than a student loan’s. So, you could use home equity to pay for a college degree.

Take Action on Your Refinance Options Today

A cash-out refinancing loan offers real estate investors significant financial advantages. These span from lower interest rates, especially compared to other types of loans, as well as the potential to raise your credit and lower your taxes. For many, these loans can be a no-brainer decision.

An optimal way to get your cash-out refi on an investment property is hard money loans. These loans are designed specifically for real estate investors. Furthermore, they are known for their lightning-fast payout and similarly fast repayment rates. Contact us today to gain an expedited addition to your cash flow.

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