What Is Cash-Out Refinancing & How Does It Work?
Real estate investors understand how important it is to remain capitalized, especially in the rapidly changing market that we find ourselves in today. By keeping yourself flush with cash, investors can leverage more projects and scale their real estate business quickly, allowing them to reach their financial goals even faster.
One of the best ways to capitalize yourself is by taking cash out of an existing property’s equity with a cash out refinance. If you’re a new investor or just new to the world of cash out refinancing, we’ll break down the basic cash-out refinance steps so you can begin to leverage your capital like a seasoned professional!
How Does Cash Out Refinancing Work?
Once you’ve built up enough equity in your existing property, which occurs after you’ve paid off a substantial portion of the property’s mortgage, then you can access that equity in the form of cash by utilizing cash-out refinancing. You can build equity in your home quicker by paying more than your minimum monthly payment, or if you make a larger down payment on the initial purchase then you can start ahead of the curve and recoup some of that cost in the form of equity.
With enough equity built up, you can refinance your existing mortgage into a new loan that will include the property’s equity cash out. The difference between your new loan amount and the remaining amount owed on the initial loan is what you can receive as a cash out. For some quick math: let’s say your home is valued at $500,000 and your remaining current mortgage balance is $200,000, meaning you hold $300,000 of equity in your property. You could refinance your loan balance of $200,000 for $250,000 and receive $50,000 in cash at the closing table.
You could then take that $50,000 and put it towards the purchase price of your next investment property, letting you begin your next project even sooner and accelerate your real estate investment business. With the rising home prices occurring across the country, its possible that your home valuation is higher than you expect. Since an appraisal is ordered once the cash out refinance process has started, you could be surprised to find out that you have access to more capital than you were expecting!
Real estate investors can use our free cash out refinancing calculator to crunch the numbers on their home equity loan refinance and determine if its the right strategy for them to raise capital for their next deal.
How Long Does A Cash Out Refinance Take?
Banks and other large financial institutions tend to take longer due to more strict documentation, taking between 45 and 60 days on average to complete a cash out refinance. With the increased popularity of cash out refinancing in recent years, thanks to home valuations skyrocketing across the country, banks can be bogged down with requests and potentially take even longer to manage your loan refinance. The upside is the guarantee that comes from banks, as their process and capital is secured in a way that makes them a safe choice. However, real estate investors looking for capital towards their next project are typically working on short time frames, where an extra few days can mean the difference between securing the deal or having it slip through their fingers. That’s why alternative lending options, like working with a private hard money lender, tend to be much more useful for real estate investors.
At Asset Based Lending, we offer the best cash out refinancing rates that take less than 30 days, and can close as quickly as 20 days with the appropriate paperwork. Similar to other ABL loans, the cash out refinance process is quick and simple, especially compared to banks. The time frame includes verifying documents, ordering an appraisal and waiting for it to come through, and contacting the appropriate parties such as legal and title to ensure everything is ready at the closing table. The actual cash out refinance process is the same as a bank, but with less documentation needed and a focus on moving quickly. Once we receive the required paperwork, our in-house team handles the process from start to finish to introduce you to your new fixed 30-year mortgage, along with the cash out you’ve received from your property’s equity.
Cash Out Refinancing Pros And Cons
As with every type of investor financing, there’s pros and cons The biggest pro is obviously the large influx of capital you receive to put towards your next project. Being flush with cash makes real estate investing that much easier, and will help you win over opportunities that you may not have been able to without it.
Another pro to cash out refinancing is the predictable payments you’ll be making. With your new loan terms written out and clearly communicated, you’ll know exactly how much money you owe per month, which means you can begin to budget for this refinance before you even reach the closing table. These predictable payments make cash out refinancing easy, as a 30-year fixed rate is the most common refinance option and allows borrowers to plan their financial future in a simple manner.
The pro that often goes overlooked are the potential tax deductions that come from refinancing your mortgage and using the funds to increase the value of the property. Talk to your accountant about your plans for your cash out refinancing and what the money will be going towards so they can help guide you on what deductions you’re eligible for. Plus, the cash you receive from the property’s equity isn’t taxed since its part of a loan, so that cash is completely yours!
The cons of cash out refinancing are minimal, as long as the borrower is ensuring they’ve done their due diligence and budgeted themselves correctly. That said, there are a few potential risks to think about before moving forward with your hard money cash out loan. The biggest con is the fact that you will increase your debt load after refinancing. Since you’ll be replacing your current mortgage with a larger mortgage, you’ll owe more money overall, which is the exchange for pulling cash out of your home’s equity. With real estate investors using their new capital towards other profitable projects, this larger debt should be minimized by the success of your upcoming projects.
Another con is that lenders want to see a certain amount of equity built into the house before offering refinance options, typically at least 20% of your existing mortgage. If the property is freshly purchased and you haven’t made many payments towards the balance, then lenders may not be interested in moving forward on a cash out refinance. That means you may need to hold the property for a few years or increase your monthly payments so you can build up enough equity where lenders will start to consider offering you a cash out exchange.
Closings costs are the final drawback of refinancing a loan for cash out, as it takes a few thousand dollars to fully service the loan refinance due to various costs such as legal and title. Although, this is a small portion of money compared to what the borrower receives in the form of cash out, and is simply the cost associated with these large financial transactions. Once again, since this new capital should be going towards your next real estate investment, the profits from upcoming deals should help offset these minimal costs.
Access to capital is one of the best ways for real estate investors to remain active in their markets. Capital and opportunities are the name of the game, so ensuring you’re well capitalized by making your cash continue working for you instead of leaving it tied up in equity or stale projects is what separates the rookies from the professionals. Investors looking to acquire a home equity loan refinance have more options than ever before, such as using a private hard money lender instead of relying on the slow lending process of a bank.
Given the flexibility of hard money loans, you can work with your favorite hard money lender on your cash out refinance! Asset Based Lending offers cash out refinances, along with fixed mortgage loans for rental property. That’s one of the major benefits of refinancing with a hard money lender- less documentation and faster turnaround times means investors don’t have to wait around and watch opportunities pass them by.
From there, you can even use our other financing options, such as our fix and flip loans, to begin working on your next investment opportunity. As a one-stop shop for investor lending, we strive to be accessible and reliable for real estate investors across the country. If you have any more questions about the meaning of cash out refinance or are ready to get started on accessing your existing equity, then give us a call at 201-942-9090 or click here to learn more about how ABL can finance your success.