Refi/cashout? Having a hard time wrapping my head around it.

8 Replies

I understand the concept, but how does it work?

fter I refinance, what am I cashing out?

In what form dAoes the cashout come?

  • Cash in the form of a check?
  • A line of credit at the bank that can be used in any way I decide?

What is the typical interest rate?

This has come up in convos relative to HELOCs. I understand the HELOCs and where that money comes from, this one is next.

Thanks, Chris

When you refinance, "cash out" refers cash that goes to the borrower rather than going to pay off any existing loan or costs for the loan. That's as opposed to a "rate and term" refi where the new loan just pays off the existing one and doesn't result in cash to the borrower. Yes, the cash is in the form of a check. Could be a wire, if you're in a hurry and are willing to pay the extra fees. Interest rate is about the same as any other similar mortgage. It will depend on OO vs. NOO (NOO is higher), 30 year fixed vs. 15 year fixed vs. an ARM or other choices, your credit score, LTV, etc.

@Jon Holdman  

Ok,

So as a homeowner, trying to reduce my interest rate and PITI, I would be interested in the "rate and term" model. Whereas as a REI, I am interested in the cash out model. Correct?

"Cash out"

  • How is the amount of cash I recieve calculated? Is it a function of the equity?

Under the "rate/term" model the lender is getting their money back immediately. Under the "cash out" model, it seems that I am leveraging more. That is fine with me, but I dont see how the lender would be OK with this continuously.

@Chris Stromdahl  Yes, it is a factor of your equity value. Most lenders will give you about 80% of value in a primary residence loan in a cash-back scenario.  If you have more equity than that, you can take cash back up to the ltv allowed.  

There's no relationship between rate and term vs. cash out and homeowner vs. investor.  You do a rate and term refi when you want to reduce your payments.  That could be a homeowner or an investor.  You do a cash out refi when you want to get cash.  These really are almost exactly the same transaction.  The difference is that with a cash out the borrower is increasing the total amount of money borrowed and sticking the extra in their pocket.  Note that both will have costs associated with them, so even a rate and term refi will result in a larger debt if the costs are rolled into the new loan.

Its also possible to do a "cash in" refi where you have to bring cash to closing to get the new loan.

The amount of cash you can get is related to, but not based on, the equity. Its based on the total value. For an investor loan, you might be able to get a 80% LTV loan. That is, the lender will loan you 80% of the value. So, say you bought a house for $100K, put in a $20K down payment and spend $20K fixing it up. A year later, a new appraisal says its worth $175K. The existing loan would have a balance owed of a bit under the original $80K balance. Payments at first are almost all interest. If a bank will lend you 80% of the new value, you could get a loan for $140K. Costs vary, but I'd guess them at around $5000. So, after paying off the old loan and covering the costs you would have $55K in cash. You would now have $140K in debt instead of $80K. But you have the $40K you put in up front back plus another $15K. This can help you expand your portfolio, if you can do it. Its not easy to get these loans, especially if you already have more than four mortgaged properties. Lenders are a lot more willing to make a loan to pay off another loan than to hand over cash.

Note, also, that all this still applies if you own a house free and clear.  There's just no existing loan to pay off.

@Jon Holdman  is clear and concise.

And the thing to remember, cash out on a property is great, just make sure you haven't over leveraged yourself.  AND, make sure you have changed your reserves to make up for your new larger payment.  

We are in the process right now of refinancing one of our properties and getting cash out, start to finish in about 2 weeks ... it's always easier to work with a local/community bank where you can talk with people who make decisions.  

You also have to be careful and mindful that it's very probable your appraisal that determines how much "cash back" you receive might come back very conservative.

Many appraisers are trying to strengthen their relationship and protect the bank. Most banks that do cash out refi's do not let you choose your appraiser unfortunately. I've learned this the hard way.

My experience is that the larger lenders dislike cash out refi's as opposed to rate and term and have quoted me higher rates. These rates have also been considerably higher than if you were purchasing.

It was explained to me that the lenders really got burned by investors pulling cash out then walking when values dropped during the recent crash.

I see in your bio you are an agent. You should be an expert in this area of finance because your customers are going to do this to purchase properties. Research from the banks doing loans in your area whether it be the Wells or BAs or a popular mortgage broker, small portfolio lender or credit unions. Get on the phone with all of them.

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