Three reasons an investor might consider cash out refinancing
There are many reasons why an investor may choose to refinance their mortgage. While you should consider a rate-and-term refinance if you simply want to lower your interest rate or change your loan term, here are three scenarios where getting a cash out refinance loan may make more sense in the long run.
To finance the down payment on another property
The most obvious reason to refi as an investor is to expand your portfolio. You can use the extra cash from your refinance loan to finance the down payment on another investment property.
Best of all, when interest rates are low, you can often secure the down payment at a better rate than other financing options, such as a personal loan, home equity loan, or home equity line of credit (HELOC).
To renovate an investment property
If you're following a buy-and-hold investment strategy, odds are good that your investment property will eventually need some big-ticket renovations. Whether you need to put on a new roof or you simply want to renovate the kitchen to help secure a higher rental value, cash out refinancing can help you use your home's equity to come up with the cash to pay the contractor.
To finance another expense
While it's generally not a good idea to mix business and personal finances, the proceeds from a cash out refinance loan can be used to cover expenses unrelated to your investment property.
For example, many homeowners use cash out refinances for debt consolidation if they have a lot of credit card debt or a student loan that has a higher interest rate. You can also use the funds from a cash out loan to pay off medical debt or to finance other costs.
Considerations before refinancing an existing loan
Even if you have a good reason for refinancing your current mortgage, there are still quite a few factors to weigh before you speak to a loan officer. We've laid them out below to give you a better idea of whether opting for a cash out loan is right for you.
Your monthly mortgage payment may increase
First and foremost, your monthly payment may go up. Since you're borrowing more money than you owe on your current mortgage, your principal balance will go up -- and your monthly mortgage payment may rise with it. As a rule of thumb, people generally only choose this loan option when they can save on interest rates in order to offset the added expense.
Investment property loans have stringent qualifying requirements
Overall, investment property mortgages tend to have stricter qualifying requirements than mortgages for primary residences. This is because lenders tend to see investment property mortgages as riskier, and refinances are no exception.
If you're considering refinancing an investment property, make sure that you have a high credit score, a low loan-to-value ratio (LTV), and plenty of cash reserves.
You may need to season your mortgage loan
Many new investors believe that they can use a mortgage refinance to fund a fix-and-flip investment strategy. Unfortunately, this is not usually possible because many lenders have a seasoning requirement that you must fulfill before you can refinance an existing loan.
While every lender is different, most seasoning requirements state that borrowers must keep their original mortgage for at least six months before they can become eligible to refinance.
Refinancing could reset the clock on your debt
Finally, refinancing means it could take longer to pay off your debt. In this case, your principal balance will be spread over your new loan term, just as it was when you took out your original mortgage. If you choose a longer loan term, which often results in a lower payment, it will take longer to pay your new loan off in full.
The bottom line
When interest rates are low, cash out refinancing can feel like an obvious choice to help you move your investment strategy forward. Still, this real estate financing option is not the right choice for everyone.
While this guide can help you get started figuring out if a cash out refinance loan is right for you, if you have specific questions, your best bet is to talk to a loan officer. They can look at the specifics of your financial situation and answer any questions you may have.