Cash-Out Refi vs. DTI Constraints: What’s the Smart Move for Long-Term Growth?

Question

We’re trying to decide whether to move forward with a large cash-out refinance on our primary residence to consolidate ~$47k in debt and pull ~$50k to complete a nearly-finished ADU. Current mortgage balance is ~$497k at 3.125%, and the refi offer is for ~ $787k with a payment around $5,600 (up from ~$4,900 total today including debts). The lender is also offering a “6-month lender streamline” where, after six on-time payments, they claim they can lower the rate by 0.5% with no fees, no appraisal, and no income/credit check. Our concern is restarting the mortgage at a higher rate and larger balance, but finishing the ADU would immediately create $2,700–$3,200/month in rental income, improving DTI and helping us eventually rent out both the ADU and main house and then buy another primary. We’re trying to figure out whether this refi makes sense strategically for long-term wealth building given our goals, the current rate environment, and the lender’s program terms.

Are we on the right track by considering this Refi? I'm worried our current DTI is too high to request an increase on our HELOC or be approved for a new HELOC. Thoughts, comments, concerns are all welcome! TIA

Dan H. · Answer

If the $5600/month is P&i only, your new rate is over 7.5%.  That is high in this market.   It is possible by payment you meant PITI, but it is not clear.   What would be the rate on your new loan?

If your new rate is over 7.5%, that would make virtually any investment challenging.  Regardless have you ran the numbers on using an equity line of credit rather than the refi.  I recommend analyzing this option as your 3.125% current loan is virtually free money.

Did you do underwriting on the ADU before starting it.   $50k seems a lot to complete a nearly complete ADU.   Using 50% rule with ADU addition completely financed, using the lower range of rent range (when I underwrite I always use the conservative point of any range), I show the cash flow is $0 at $225k cost of ADU addition.   Note in most areas the ADU adds less value than the hands off cost of the ADU addition, implying no real cash flow until this negative position is recovered.  Building a small single unit is the most expensive residential development.

Where is the property?

Good luck

Samantha Anderson · Answer

Thanks for the thoughtful response, really appreciate you digging into the numbers with me.

To clarify the payment question: the $5,600 figure is PITI, not P&I only. The rate being quoted is in the mid-5-6% range, not 7.5%+. The lender is also proposing a 6-month internal “streamlined rate reduction” (not FHA) that would drop the rate another 0.5% with no fees, no appraisal, and no re-underwriting. I’m still getting that in writing, but that’s the structure they’re presenting.

We did explore the HELOC route aggressively, but with our current 49% DTI, we’ve hit a wall with every credit union and bank so far, even with strong credit. The refi is less about chasing a low rate and more about:

• Finishing the ADU,
• Consolidating ~$47k in higher-interest debt, and
• Lowering DTI long-term once the ADU is rented.

Finishing the ADU,

Consolidating ~$47k in higher-interest debt, and

Lowering DTI long-term once the ADU is rented.

On the ADU itself, yes, we underwrote it before building. We’re in Thousand Oaks, CA, where ADU rents for a new 2-bed unit are extremely strong. Even on the conservative end ($2,700–$3,000/mo), 75% of that rental income immediately improves our DTI back into the low-40% range, which opens the door for a future lower-rate refi or HELOC.

And on the cost: the $50k remaining isn’t for the entire ADU — it’s what’s left to finish (Hardscape, cabinets, flooring, fixtures, and final labor). The heavy/mechanical work is already complete.

Long-term, our strategy is to finish the ADU, rent it, eventually rent the main house, and use the combined income + equity position to purchase our next primary. The cash-out refi is just the bridge to get there since the HELOC route isn’t workable at our current DTI.

Thanks again, open to any other thoughts you have.

Jaycee Greene · Answer

Hey @Samantha Anderson, welcome to the BP Forum! What's your current DTI and what are you projecting it to be if you do the refi? Is the "lender" a bank or credit union?

Samantha Anderson · Answer

Thanks for the welcome! Our current back-end DTI is about 49%, which is why we’re running into HELOC approval issues. If we do the cash-out refi, our new mortgage payment would be around $5,600, which technically bumps DTI to roughly 56%, but the lender has already underwritten and approved that number.

Once the ADU is finished and rented (conservative rent estimate $2,700/mo, lenders usually count 75% of that), our effective DTI drops back into the mid-40% range. If rent comes in closer to $3,000–$3,200, we’d be in the low 40s, which opens us up to better refi or HELOC options later.

As for the lender, it’s a direct lender (not a credit union) offering an internal “streamline rate-reduction” program after 6 on-time payments, no appraisal, no income re-verification, and no lender fees for that second refi. I’m still working to get all of that in writing, but this structure is what’s making us consider the refi despite the higher rate. The rate they're currently offering is 5.5%, and .5% off if the streamline rate reduction is available in 6 months