Is A Cash-Out Refinance Of An Investment Property Right For Your Rental Business?
Recently, mortgage rates have hit historic lows. As a result, many property owners are considering refinancing. But cash-out refinancing offers you more than today’s interest rates. You can take advantage of your property’s new equity and access the two mortgages’ difference in cash.
That cash can mean a world of difference in your rental business and personal life, from funding home improvement projects to helping you consolidate debt. If you’re interested in the ways a cash-out refinance investment property can help you, read on.
Reasons For Refinancing A Multifamily Home
Everyone’s situation is different. But property owners often have the same reasons for refinancing a multifamily home as those with a single-family home.
You may want to grow your business or pay less on your monthly mortgage. Or, you might see it as an opportunity to improve your personal life or property using the cash-out funds.
Growing Your Business
Your rental units might be well-maintained and more or less up to date. In that case, investors can use the cash to grow their real estate portfolio. Meaning, you can use the funds to purchase more properties and expand your business.
Depending on the amount you receive through the refinance, you may choose different ways to go about it. If your home holds more equity, you’ll have more money to buy new properties. Alternatively, with less money, you can simply put it towards a down payment.
Reducing Your Overall Mortgage Costs
A cash-out refinance might give you a new loan with a better interest rate. Right now, mortgage interest rates are historically low. So, jumping on to the trend might earn you the same competitive rates. However, the Fed is facing inflationary pressures, which may lead to rising rates soon.
As a result, timing is a part of lowering your mortgage costs. If you can, though, it will save you money on the overall loan and in the long term.
Renovating The Current Property
Renovations are expensive, but the state of your rental properties directly connects to your business’s success. So, one of the biggest reasons why investors choose a cash-out refinances is to pay for property improvements.
Rental property investors may need to address regular wear and tear or aging. They also may want to update the property. By investing into the rental, you bring up the value and can charge more for rent.
Leveraging A Financial Tool
Life often throws us curve balls. You can use your cash-out refinances as an important financial tool to combat these problems. Because unlike other loans, you can use the cash from refinancing for anything.
For example, you may need an extra boost to your savings, such as retirement, college or even an emergency fund. Alternatively, investors might want to use the cash for business expenses, like maintenance or development.
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Requirements For Cash-Out Refinance On A Multifamily Home
The requirements you may face for a cash-out refinance will heavily depend on the loan’s purpose. However, other factors also come into play. Here’s a rundown on what you should expect your lender to pay attention to.
Loan-To-Value Ratio
If you want to refinance or take cash out, you need to build home equity first. Home equity is the difference between the amount you owe on your loan and the value of your home. Lenders measure this as a loan-to-value ratio (LTV).
LTV acts like the opposite of your home’s equity. So, for instance, if you paid off 20% of your current mortgage, then you would have an LTV of 80%. Although, there are some exceptions. If you owe more on your home than it’s worth, refinancing is not an option.
Credit Score
If you’re considering refinancing, you already know that a credit score is essential when borrowing. It’s a crucial factor in getting approved for a mortgage. Generally, the higher your score, the lower the interest rates you’ll have to pay.
Every lender is different and may ask for a unique minimum credit score. Although you want to aim for a higher score, there are lenders who accept lower ones.
Income And Assets
Another factor your lender will focus on is your debt-to-income (DTI) ratio. This measures the amount of income put towards revolving and installment debts, such as car payments or credit cards.
Your lender wants to ensure you have sufficient funds. So, they also create reserve requirements. A reserve is a savings balance held until after you close your property purchase – an emergency fund. If you don’t have enough, you may not be able to move forward with your refinancing.
Usually, your rental income can also count towards this reserve amount. But you must meet the lender’s documentation guidelines.
Requirements For Cash-Out Refinance On A Multifamily Home
The requirements you may face for a cash-out refinance will heavily depend on the loan’s purpose. However, other factors also come into play. Here’s a rundown on what you should expect your lender to pay attention to.
Loan-To-Value Ratio
If you want to refinance or take cash out, you need to build home equity first. Home equity is the difference between the amount you owe on your loan and the value of your home. Lenders measure this as a loan-to-value ratio (LTV).
LTV acts like the opposite of your home’s equity. So, for instance, if you paid off 20% of your current mortgage, then you would have an LTV of 80%. Although, there are some exceptions. If you owe more on your home than it’s worth, refinancing is not an option.
Credit Score
If you’re considering refinancing, you already know that a credit score is essential when borrowing. It’s a crucial factor in getting approved for a mortgage. Generally, the higher your score, the lower the interest rates you’ll have to pay.
Every lender is different and may ask for a unique minimum credit score. Although you want to aim for a higher score, there are lenders who accept lower ones.
Income And Assets
Another factor your lender will focus on is your debt-to-income (DTI) ratio. This measures the amount of income put towards revolving and installment debts, such as car payments or credit cards.
Your lender wants to ensure you have sufficient funds. So, they also create reserve requirements. A reserve is a savings balance held until after you close your property purchase – an emergency fund. If you don’t have enough, you may not be able to move forward with your refinancing.
Usually, your rental income can also count towards this reserve amount. But you must meet the lender’s documentation guidelines.
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Cash-out Refinance Requirements At A Glance:
|
Type Of Mortgage |
Credit Score Required |
LTV |
Reserves |
Owner Occupancy Required (Y/N) |
DTI |
||||||||||
|
Number of Units |
2 |
3 |
4 |
2 |
3 |
4 |
2 |
3 |
4 |
2 |
3 |
4 |
2 |
3 |
4 |
|
Conventional |
620 |
620 |
620 |
70% |
70% |
70% |
2 – 12 months |
2 – 12 months |
2 – 12 months |
N |
N |
N |
50% |
50% |
50% |
|
FHA |
580 |
580 – 620 |
620 |
80% |
80% |
80% |
6 months |
6 months |
6 months |
Y |
Y |
Y |
38% – 45% |
38% – 45% |
38% – 45% |
|
VA1 |
580 |
580 |
580 |
100% |
100% |
100% |
6 months |
6 months |
6 months |
Y |
Y |
Y |
60% |
60% |
60% |
|
Jumbo |
680 – 700 |
680 – 700 |
680 – 700 |
90% |
90% |
90% |
6 – 12 months |
6 – 12 months |
6 – 12 months |
N |
N |
N |
45% |
45% |
45% |
Note: The above numbers are estimates only and subject to change. 1If you want to cash out all of your home equity with a VA loan, your credit score must be above 620 or you can cash out only 90% equity.
Can I Take A Home Equity Loan Instead Of Completing A Refinance?
When you’re looking for funds to better your business and life, you may consider your options, such as home equity loans versus a cash-out refinance. Like cash-out refinancing, home equity loans provide you with a lump sum payment. However, they are a separate, second loan with no impact on the first.
Both mean money in hand as soon as possible, but cash-out refinances typically come with better interest rates. So a cash-out refinance might work for you.
However, home equity lenders often pay most or all of the loan closing costs. Crunching the numbers for both options will help you find the method that makes sense for you.
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The Bottom Line: Ready For A Cash-Out Refinance On Your Multifamily Home?
Your situation is unique, and your financing options should match. Each one comes with its advantages and drawbacks. So, explore the variety of refinance options available that can help you achieve your goals.
If you’re ready to get started on a cash-out refinance application, check out Rocket Mortgage’s refinance rates today.
1Rocket Mortgage, LLC, Rocket Homes Real Estate LLC, and RockLoans Marketplace LLC (doing business as Rocket Loans) are separate operating subsidiaries of Rocket Companies, Inc. (NYSE: RKT). Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation and applicable legal and regulatory requirements.
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Andrew Dehan
Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.