What Is a Cash-Out Refinance?

If you are a investment property owner, you surely know what financing is. In simple words, it means to manage by some means the expenditures that you are going to have. I’m sure you also came across the phrase mortgage refinancing? If not, well its similar financing however, its to focus is to change the terms of an existing mortgage.

Maybe you have already understood that the term refinancing is highly regulated around mortgages. Before we get to the main point, what cash-out refinance is, we better know what refinancing is. In the following paragraphs, we will discuss refinance, cash-out refinance, and how all these can help or hinder your property value, your personal finances and or your business.

What Is Refinancing?

Refinancing means taking a new mortgage, which will replace your already-existing mortgage. The key target here is to pay off the debt of the first mortgage. Hence, you can easily say that the new mortgage should have better terms than the previous one, improving your financial condition. A question arises in this regard, should you go for a second mortgage when you already have one?

There might be several reasons for this. However, one of the most basic reasons can be that your existing mortgage was either too risky or too expensive. Another possible cause may be that your financial position has changed since the time you took the first mortgage, and hence you are going for an option suitable for you now. And another cause for refinancing your mortgage can be the availability of loans with more beneficial terms now.

This could have positive and negative effects by misleading people into believing that they won’t have any debt after refinancing. However, that is not the case although refinancing has both merits and demerits. If you know about the types of refinancing, it will be clearer to you. Now, let’s get to the point, what cash-out refinancing is.

Cash-Out Refinance

The term ‘cash-out refinance’ is used when regarding to mortgages for investment properties, such as a warehouse. A cash-out refinance means that your property is has additional equity and that the existing mortgage is significantly lower than the market value. In the case of a cash-out refinance, you get the extra amount when the LTV (Loan to Value) is lower. However, it is not as simple as it seems. Just like you had a mortgage for your previous loan, you must have equity in your investment and at times rental income can account for the more the additional amount you desire. Only then, a cash-out refinance will be possible.

As mentioned, you cannot get the total equivalent amount of the equity at your rental property. Even after refinancing, there must be some extra equity left above the refinance amount. Let’s say your warehouse is valued at $250,000, and your mortgage balance is $150,000. In that case, you have an equity of $100,000 in your warehouse. Now, for your loan balance of $150,000, you can refinance it for $200,000, receiving $50,000 in cash, which you can then use for renovations.

Pros of a Cash-Out Refinance

Possible lower interest rates: The best time to cash-out refinance usually when interest rates are lower rather than a traditional loan or secondary mortgage based on the amount of equity of property. A Cash-Out Refinance doesn’t necessarily mean that you are looking for a lower interest rate. Based on the time you took the previous loan, your cash-out refinance will offer either a higher interest rate or a lower one. Nevertheless, compared to recent years’ mortgage rates, interest rates are lower than that of the previous years.

Tax deductions: A cash-out refinance can be also help increase tax deductions. However, to receive this extra benefit, you will have to use the cash-out refinance money to improve the rental property.

Debt consolidation: As you get cash in hand from your cash-out refinance, you can easily pay off credit cards or pay off additional debt potentially saving you thousands of dollars.

Cons of a Cash-Out Refinance

Getting along with new terms: Although the term ‘refinance’ is used here, it is nothing other than a loan. And like all other types of loans, this new mortgage will have its own terms. And there is a higher possibility that the new terms will highly differ from that of your previous loan terms. After all, you are going for a refinance for these new terms. Nevertheless, you should be careful about the interest rates, fees, etc., that these terms include.

Foreclosure risk: Whether you are on your previous mortgage or going for a cash-out refinance, your warehouse is at risk either way. And as you are paying off your credit card debts with the cash from a cash-out refinance, you are actually paying off unsecured debts with the secured ones.

Final Thoughts

If you are looking for an investment property renovation, making a new investment or similar, a cash-out refinance may be the perfect choice for you. See how much your investment property appraises for today, contact a Refinance Specialist today.