I have a quick question that I have not be entirely sure on. When someone does a cash-out refinance, do they essentially get cash into their bank account from their equity? Or is it more like a line of credit? For Example:
-Investor buys distressed house for $30,000 with mortgage
-Puts $20,000 in rehab
-The market value is now $100,000
-Assuming the bank will only do 80% loan to value.
Investor now cash-out refinances and gets a $50,000 check? Am I right in thinking that this is how it works?
I do realize there are various types or refinancing options, but I am more so interested in cash-out.
When you do a cash-out refinance, the bank will pay off the original mortgage and replace it with their own. The difference between the original mortgage and the new mortgage will become due at the closing of the refinance. If the difference is in your favor, you get a check. If it's in the bank's favor, you write the title company a check.
SO in your example, you would have a 30k mortgage in first position. Assuming you paid 20k in cash for rehab, you then refinance and get a new 80k mortgage. The original 30k mortgage gets paid off and you get a check for $50k. This pays you back your 20k rehab costs and puts an additional 30k into your account for future investments, paying off debts, vacation in Tahiti, cap ex for business, etc (whatever you want).
Just make sure your new mortgage payment works with your rental income and expense reserves to where the property is still cash flowing. You might have to lower the cash out amount based on the loan terms to make sure you're not creating an alligator.
If you were happy with the terms of the original mortgage and wanted to keep it, you could simply open a HELOC (home equity line of credit) and that would basically be a credit line against the equity in the property. Ultimately, what you are wanting to do with the money, your long term goals, the terms of the original and new mortgages, all play a factor in the decision making process.
That makes complete sense! Thank you Matt Motil for the detailed response!!
Old thread but I wanted to reopen this because this is the exact question I've been wanting to ask, except what if the house was purchased with cash instead of a mortgage?
So if I purchased the property for 30k cash and rehab 20k at and ARV is 100k with an 80% LTV ( same scenario as above) how would I obtain the "cash" from doing a cash out refi and now obtaining a mortgage?
I hope I'm wording it correctly to get my question out there clearly. Thanks for any clarity on this!