What is a “cash out refi”? And how do I use that as a strategy?

Question

Hello all

I’m looking to start my journey of creating a real estate portfolio for renting. One thing I’ve come across in my research is what’s called a “cash out refi”. Could anyone here educate me on what that is exactly and how it works? So far my concept is to use equity gained in properties I buy to buy more, is this the right way to do that?

Charlie MacPherson · Answer

@Nathan Fraser  Correct.  Talk with a lender and they'll walk you through it.

For the most part, you can plan on the balance on the loan plus the equity you take out totaling no more than 80% of the current value as determined by a formal appraisal.

Nathan Fraser · Answer

@Charlie MacPherson

Thank you for your response

So, if I’m planning on keeping the home and not selling it (I’ll use it as a rental), am I the owner or the seller in your example?

Charlie MacPherson · Answer

@Nathan Fraser A cash-out refi is a refinance of a property that has equity.

Let's say I have a house that has a value of $100,000.  Between price appreciation and the balance that the seller has paid down from the initial loan, there is equity.  Let's pretend that there's $50,000 in equity.

In the cash-out refi, the owner refinances the home for up to 80% of the current balance of the property and takes a cash payment for some of the equity.

The loan might look like a new $80,000 mortgage.  $50,000 to pay off the previous mortgage and $30,000 paid in cash to the owner at closing.

There's still $20,000 (20%) in equity, which the lender would most likely require as a minimum amount of equity.

Make sense?