Cash out refinance example

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Cash out refinance example

Account Closed
Member since 2020 · 18 posts · 15 votes

Hi

I'm looking to buy a 2nd rental property out of state in Ohio. I'm trying to figure out a way to put little to no money down for the loan. I can't do FHA since I wont be living in the property. I wanted to get a better understanding of what is cash out refinance. I did read about it in one of Biggerpockets books. I read about it on google. It still doesnt make sense to me. Can someone pls explain to me in an example with numbers? I know it means refinancing your existing property. But what is cash out mean? Do you have pay that back with the refinanced loan? The lender just gives you excess cash that you dont have to pay back? Thats the part I dont get. For ex, lets say I wanted to borrow money from my 401k for down payment and I take out a loan for the remainder. Then if I do cash-out refinance later, the lender will give me money to pay back my 401k and I dont pay him back for that? Sorry If I sound stupid but I really want to understand this concept. Thanks in advance.

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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
4y
Quote from @Account Closed:

Hi

I'm looking to buy a 2nd rental property out of state in Ohio. I'm trying to figure out a way to put little to no money down for the loan. I can't do FHA since I wont be living in the property. I wanted to get a better understanding of what is cash out refinance. I did read about it in one of Biggerpockets books. I read about it on google. It still doesnt make sense to me. Can someone pls explain to me in an example with numbers? I know it means refinancing your existing property. But what is cash out mean? Do you have pay that back with the refinanced loan? The lender just gives you excess cash that you dont have to pay back? Thats the part I dont get. For ex, lets say I wanted to borrow money from my 401k for down payment and I take out a loan for the remainder. Then if I do cash-out refinance later, the lender will give me money to pay back my 401k and I dont pay him back for that? Sorry If I sound stupid but I really want to understand this concept. Thanks in advance.


 When you refinance this is what happens: 

You pay off your existing mortgage and replace it with a new mortgage. 

This means that your new lender pays off what you owe and issues you a new loan. 

When you do a cash out refinance you take on a bigger loan. So for example, You owe, $300,000 on a property worth $1,000,000. If you do a 75% LTV cash out refinance, This means you are borrowing $750,000 instead of $300,000.

Once you subtract your existing mortgage ($300,000) with your new one ($750,000): Your cash out is $450,000. 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    It's pretty simple really.  You start with an existing loan on a property from when you buy it.  Usually the loan is worth 80% of the cost (property value).  As the property appreciates, and/or gains in value from other means, the original loan may now be only 65% of the new PV.  This is when you do a cash out refi.  This new loan would be for 75% of the new PV (the percentage is different based on each lender).  The new loan pays off the original loan, and what ever is left over is the "cash out".  What you are doing is taking the equity and taking it "out" in the form of "cash".

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    4y

    @Account Closed here's two different scenarios for you to think about.  Usually a "cash out" loan is limited to 75% of the property value.

    Scenario 1

    Property is valued at $200,000

    You purchase property in cash.

    Since you buy in cash, the seller gives you a $5,000 discount.  So you pay $195,000 + closing costs for the property.

    You have no mortgage on this property.  But you want to get a "cash out" mortgage to get your money back from the property.

    The new mortgage gives you 75% of $200,000 = $150,000

    The new loan has closing costs so you receive $140,000 back to yourself after paying closing costs.  You received "cash out" from the property of $140,000, your new loan is $150,000

    That's scenario 1

    Scenario 2

    Property is worth $200,000

    You get a mortgage to purchase the property.

    Your new mortgage requires a 20% downpayment (+ closing costs).  You purchase property and owe $160,000 on your new mortgage.

    You want to receive a "cash out" loan....but the cash out limit is 75% of the property value....you owe 80%.  You are already ABOVE the maximum amount a cash out loan can provide.

    You cannot receive a cash out loan in this scenario.

    I hope that makes sense how I am describing it.  Feel free to ask anything else additional though.  Thanks!

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  • Account Closed
    OP
    Member since 2020 · 18 posts · 15 votes
    4y
    @Joe Villeneuve:

    Thank you! So basically "cash out" is what I have left in equity and I dont have to pay that extra amount back? I would only be paying back the new loan minus my equity? 


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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Account Closed:
    @Joe Villeneuve:

    Thank you! So basically "cash out" is what I have left in equity and I dont have to pay that extra amount back? I would only be paying back the new loan minus my equity? 


    No.  Let me give you numbers:
    1 - Buy property for $100k.  Put 20% DP ($20k), means 80% loan ($80k).  The DP is your original equity you are buying.
    2 - Property appreciates to a new PV of $120k.  New Equity is $40k (original $20k + the $20k appreciation).
    3 - Refinance for 75% of PV = $90k.  This is your new loan.
    4 - Take $90k from new loan (#3) and pay off original mortgage of $80k.  That leaves $10k...which is your cash out amount.
    5 - That $10k represents PART of your equity, the rest of the equity ($30k) remains in the property.
    Now there are closing costs that come out of that $10k, so you wouldn't get all of it, but you would have also paid down part of the original principle from the original loan, which adds to your equity.
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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    4y
    Quote from @Account Closed:

    Hi

    I'm looking to buy a 2nd rental property out of state in Ohio. I'm trying to figure out a way to put little to no money down for the loan. I can't do FHA since I wont be living in the property. I wanted to get a better understanding of what is cash out refinance. I did read about it in one of Biggerpockets books. I read about it on google. It still doesnt make sense to me. Can someone pls explain to me in an example with numbers? I know it means refinancing your existing property. But what is cash out mean? Do you have pay that back with the refinanced loan? The lender just gives you excess cash that you dont have to pay back? Thats the part I dont get. For ex, lets say I wanted to borrow money from my 401k for down payment and I take out a loan for the remainder. Then if I do cash-out refinance later, the lender will give me money to pay back my 401k and I dont pay him back for that? Sorry If I sound stupid but I really want to understand this concept. Thanks in advance.


     When you refinance this is what happens: 

    You pay off your existing mortgage and replace it with a new mortgage. 

    This means that your new lender pays off what you owe and issues you a new loan. 

    When you do a cash out refinance you take on a bigger loan. So for example, You owe, $300,000 on a property worth $1,000,000. If you do a 75% LTV cash out refinance, This means you are borrowing $750,000 instead of $300,000.

    Once you subtract your existing mortgage ($300,000) with your new one ($750,000): Your cash out is $450,000. 

    [email protected]818-269-7983
    LuxePrivate Investments LLC 570 Reviews
    WebsiteView Page
    2Reply
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