Understanding Cash-Out Re-Fi

5 Replies

I posted this under another topic as well, so if you have already read, my apologies.

Can you please confirm my understanding of this strategy is accurate...so, I buy a cash flow property in the following manner:

Purchase Price: $100k (including all entrance costs aside from down pmt...)

Personal Cash $25k (down pmt. on 75%LTV loan)

Mortgage $75k

Amortization 30 yrs.

Interest Rate 5%

Monthly Payment $700

Rehab Costs $12k

Total Personal Cash on Deal $37k

ARV $130k (after rehab and 6 mos. seasoning)

then...

Re-Fi (estimates not including closing, current principal balance, etc...)

Mortgage $130k

Amortization 30 yrs

Interest Rate 4.5%

Monthly Payment $800

Loan Balance $75k

Cash at Closing $55k (mortgage - balance)

So, in this example I would be able to repay myself for the initial investment ($37k) and clear the difference to re-invest, etc...and the mortgage would hopefully be low enough to still cash flow?

This strategy seems to have infinitely different twists...things like varying rehab costs, origination fees, interest rates, amortization schedules, etc. And if the rent payment is not sufficient to cover the mortgage and have a reserve, I could lose money on a deal like this...

@Brandon Sturgill - You would still have a 75% LTV on the ARV. So if the ARV is $130k your loan would be $97,500. The original loan would be paid off and you can cash out the difference $22,500

Originally posted by @Brie Schmidt:

@Brandon Sturgill - You would still have a 75% LTV on the ARV. So if the ARV is $130k your loan would be $97,500. The original loan would be paid off and you can cash out the difference $22,500

Brie is correct, that will likely be the max you can get out. In addition, your property may not assess at 130k, or, even it does, many banks will still use the original purchase price for the LTV calculation.

Andrew is right, if you refi before 1 year they require a list of repairs you did and the cost.  a $12k rehab might not get you an increase of $30k 

We did a 6 month cash out and got our rehab costs back out plus 75% but it was still significantly less than ARV

Another point to add is that a lot of lenders will use a slightly higher interest rate and/or higher closing costs to do a cash-out refi (just because they can).  In your example your rate dropped from 5 to 4.5 which is pretty unlikely in the current interest rate/lending environment.

If you're talking about a conventional mortgage then the seasoning period is 1 year.  If you go the commercial mortgage route, some lenders will use a smaller window, but in my experience they are a lot more interested in the details of how you added value than if you wait for over 1 year.

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