Today we’re going to be talking about the cash out refinance.
This article is going to be very brief because all I want you guys to take away from this blog is what is a cash out refinance, and how you can use it.
Okay. So, a cash out refinance is the process of getting a new larger home loan (AKA a mortgage) than you already have. You then pay off your existing loan with it and keep the difference between the loans in cash. Now, the reason a lender would allow you to take out a larger loan on your home, is because the home has accumulated value because of appreciation, or because you’ve paid down the current mortgage via your monthly payments.
A caveat to the cash-out refinance is that you won’t be able to take out the entire difference between the two loans in cash, as the lender still needs you to keep some equity in the property to mitigate risk and keep your monthly payments a reasonable size.
A QUICK EXAMPLE
let’s say you bought a property a while back and its current market value is $500,000 and your current mortgage balance is $300,000. This means you have $200,000 in equity in the home. You then go to the bank and ask to do a cash-out refinance. The bank would then issue you a new loan for $400,000 which is 80% Loan-to-Value which is exactly what it sounds like: a $400,000 loan is 80% of $500,000, the value. This still leaves $100,000 in equity in your home and you would receive $100,000.
Boom! You got $100,000 out of your home’s equity in the form of a cash out refinance.
WHAT TO DO WITH THE MOOLAH
If you consider yourself a savvy investor like we consider ourselves here at Rent to Retirement, it’s important to then take that cash and re-invest it into more cash-flowing and appreciating real estate. You could also use it for renovating your property and adding equal or more value to the home. But at the end of the day it’s your cash now with no strings attached.
The best part about all of this? Cash-out refinances are a tax-free event! There is no sale happening here and it is just one loan being paid off by another loan. Woohoo! The one unfortunate thing is that lenders charge fees for doing cash-out refinances so make sure to work those fees and possible higher rates into your numbers.
MORE THAN JUST A BRICK & MORTAR
Sam Zell has an amazing quote from one of my favorite books ever called, Am I Being Too Subtle?: “Real estate isn’t just about buildings as inanimate objects. It often reflects the pulse of the nation.”
So get out there and scale up your portfolio using the cash-out refinance and start owning more of the American dream.
That’s it for this week’s blog on the cash-out refinance. If you want to know more or go further into depth like I mentioned before, reach out to our team at from our Contact Page.
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