How does REFI after Reno work?

Question

Hi,

So I have a question based on this hypothetical to see the mechanics of a refinance, specifically a cash -out refi.

So, imagine I purchase a home for $25k and then do renovations to where the value is increased by $25k to $50k. If I were to do a cash out REFI, would the remaining loan be paid off and some of the newly created equity would be loaned on so that I would receive cash back? For example, would the REFI dip into my equity by $5000 (or whatever) so my new loan would be $30k with the property as collateral? After dipping into the newly created equity, I would receive the $5k as cash back?

Does anyone have any useful guides on how the mechanics of a REFI (cash-out and rate and term) work?

JD Martin · Answer

Question 1: What loan - you didn't specify you had a loan in your example.

Making assumptions, using your example, and pretending you put 20% ($5k) down on the home and have an original $20k loan:

Fix up house, house now worth $50k. 6 months - 1 year from now cash out refinance. 75% of value = $37,500 loan, $12,500 left behind as equity in the house. Bank pays off $20k loan and hands you a check for $17,500.

Jeff V. · Answer

James,

I don't have a guide, but this has been our experience so far.

You have to know your lender's LTV criteria for a refinance...  most are 70% LTV some go up to 75%, possibly even higher, but this is lender specific. We'll use 70% in the next example.

If your newly renovated property now appraises for 100k they  will lend you 70% or 70k against the property.  If you managed to get your purchase and rehab done for 60k they would apply the 70k loan first against any superior leans to wipe them out, charge you closing costs and cut a check for the remaining cash.

Note some lenders require a seasoning period as well...  Some are 6 months to a year and some do not have a seasoning requirement for refinancing.  This is lender specific as well, so be sure to ask.

Short story is to talk to your lender to find out their requirements.

Jeff V