Refinancing a loan is a way to replace the current financing of a property with a new loan. For rental property owners, there are two main types of refinance loans: rate and term refinances and cash-out refinances. A rate and term refinance is when you refinance an existing loan in order to change the interest rates and/or terms of the loan. A cash-out refinance is when you replace an existing loan with a new loan for a higher amount, and the difference in cash is yours. Obtaining new financing on a property that is currently not pledged on a loan can also be considered a cash-out refinance.
When to Use a Rate & Term Refinance vs. Cash-Out Refinance
Borrowers often use rate and term refinances to get better loan terms. For instance, some people refinance to get a lower rate and save money. Others refinance because they get a longer term, which should lead to a lower monthly payment and improve their rental property cash flow. Some lucky investors can refinance and do both. An investor that has a property on a short-term high rate bridge note can save money and lower their monthly payment by refinancing on a 30-year loan with lower rates.
Cash-out refinances, on the other hand, are a fantastic tool for real estate investors looking to grow their rental portfolios. The cash that borrowers pull out of their existing rental properties — whether on a loan or not — could be put toward another rental property, a rental property renovation, or even a flip. Let’s take a closer look at this popular, wealth-building strategy.
How Cash-Out Refinancing Works
We already defined cash-out refinances as replacing a mortgage with a new loan for a higher amount or obtaining financing on a property that is not tied to a loan. So how exactly does that work? It all comes down to equity, which is the amount of the mortgage you’ve paid off either through payments or by your home increasing in value over time. The key to a successful cash-out refi is owing less than the value of your home.
For example, if your home is valued at $300,000 and you owe $200,000, in theory, you could pull out $100,000 of equity through a cash-out refinance. You are going to need to keep in mind the closing costs and other costs associated with the loan, as well as the maximum LTV, but we’ll discuss that more later.
Is a Cash-Out Refinance the Right Tool for You?
The answer depends on your situation. An essential factor in your decision should be the amount of equity you have in the home and how much financing you can obtain. Let’s take a look at some other key considerations.
The Costs Associated with the Loan
This includes the closing costs and fees as well as the appraisal. These can vary widely from situation to situation but are important to take into account.
The Maximum LTV
For rental loans, the maximum LTV for purchases and rate & term refinances typically is 80%, and 75% for cash-out refinances. Visio follows this industry standard.
Your Financing Goals
What are you looking to use the money from a cash-out refi for and will you be able to meet your goals by refinancing? Some common ways people use a cash-out refinance include:
- Renovating and increasing the value of the property you pull cash out of: For a newly-renovated rental property with nice amenities, like new kitchen appliances or a luxurious spa tub in the master bathroom, you can charge more rent.
- Renovating and increasing the value of another property: Refinance one property to fund the renovation for another that needs some TLC.
- Buy another investment property: A common Visio investor strategy is to pull cash out from one property to cover some of the costs of your next investment, including the down payment.
- Finance your next flip: A cash-out refinance is a fantastic alternative to borrowing hard money for flippers.
The Lender’s Requirements
The requirements vary by lender, but here is a look at the Visio Lending requirements for a cash-out refi:
- Credit Score: A minimum of 680
- Reserves: A minimum of 6 Months PITIA (Principal, Interest, Taxes, Insurance, and Association Dues)
- Borrower Type: Investors Only, Individuals, LLCs, corporations, and limited partnerships, US. Citizens
- DSCR: Minimum of 1.2
Get fast & dependable rental property refinance loans
Visio Lending is a leading provider of 30-year financing to investors in single-family (1-4 unit) residential rental properties, including vacation rentals. Visio underwrites its flagship product, the Rental360, based on property level cash flow and borrower credit, rather than the borrower’s personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of rental properties.
Key advantages of Visio’s Rental360 program over agency or bank portfolio loans include:
- No personal debt-to-income calculation: Visio uses either in place or market rents when estimating the property level cash flow.
- Low documentation requirements: Visio does not require tax returns or employment verification.
- Legal protections: Visio allows a customer to finance their rental properties in LLCs and corporations to shield their other personal assets from potential liability.
- Scalable: With proven experience and payment performance, there is no hard limit to how many properties an investor can finance with the Rental360 program.
Since late 2015, Visio has financed more than $1.5 billion in Rental360 loans.