Cash-out refinance an investment property: 2021 guidelines

Tim Lucas
The Mortgage Reports editor

It’s a good time to pull cash out from your investment property

Home prices are up — way up.

According to Core Logic, home values have increased by more than 15% since 2020.

This makes it a great time for real estate investors to “cash out” the equity in their rental properties. The cash can be used to:

  • Buy another rental property
  • Make home improvements
  • Pay off other real estate loans
  • Reduce personal debt
  • Stash away emergency cash

With mortgage rates at historic lows, it could be time for rental property owners to put their equity to work.

Verify your cash-out refinance eligibility (Oct 16th, 2021)

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How a cash-out refinance works on a rental property

With home values on the rise across the nation, many real estate investors are equity rich. One good way to tap that equity is via a cash-out refinance on your investment property.

Cashing out refinancing works the same for an investment property as for a primary home. You take out a new loan for more than you currently owe, which is used to pay off your existing mortgage. Then you receive the difference as cash-back.

You can use the cash for any purpose you want — including buying new properties to expand your investment portfolio.

There are just two main things to keep in mind when refinancing an investment or rental property:

  • The rules are a little stricter; you need good credit and more than 25% equity to cash out
  • Interest rates for an investment property cash out refinance are higher

Luckily, today’s mortgage rates remain at historic lows. So many investors can cash out on their properties and still lock in a low rate on their new mortgage.

Verify your cash-out refinance eligibility (Oct 16th, 2021)

How much equity can I pull out of my investment property?

The amount of equity you can cash out depends on your property’s current value and your existing loan balance.  

Investment property cash out loans have a maximum loan-to-value (LTV) of 25-30 percent.

That means you must leave 25-30% of your home’s value untouched— so you’ll likely need more than 30% equity to cash out.  

For example, imagine you own a one-unit property worth $300,000 and you currently owe $200,000 on the mortgage.

Do you have $100,000 in usable equity? Not quite. 

Your new cash out refinance loan has a maximum LTV of 75% — or $225,000 on a $300,000 home. $200,000 of that loan is used to pay off your existing loan balance. And the remainder — $25,000 — is your actual, tappable equity.

Cash-out refinance eligibility

Both Fannie Mae and Freddie Mac allow cash-out refinancing on investment properties. But the rules are a little stricter than for a cash-out refi on a primary residence. Borrowers need:

  • A higher credit score — Usually 680 and up
  • Cash reserves — Up to 12 months’ worth
  • Plenty of home equity — More than 25%
  • A waiting period of 6 months to refinance

Here’s a little more about what to expect when you apply for a cash-out refinance on your investment property.

Minimum credit score and cash reserves 

Underwriting is more stringent for a cash out refinance of an investment property. In other words, it’s harder to qualify for this type of loan. 

For one, Fannie Mae says the minimum FICO score allowed is 620. But many lenders set their own minimum as high as 680 or 700. 

If you have a low credit score, do some shopping. Some lenders will have lower minimums than others.

Investment property owners must also have adequate cash reserves, not including any cash received from the transaction.

Minimum reserves are determined based on your new mortgage payments, and whether other properties are owned. Expect to need anywhere from zero to 12 months of the property’s future payment in a verifiable asset account.

You may also be required to hold cash reserves equal to 2-6% of any unpaid loan balances on properties beside the one being refinanced and your primary residence.

Maximum LTV for investment property refinances

Your LTV — or “loan to value ratio” — determines your eligibility for a cash out refinance on a rental property.

You’ll need substantial equity in the home to cash out a worthwhile amount while still leaving enough to keep your loan amount below allowable LTV limits

Most lenders follow loan-to-value (LTV) rules set by Fannie Mae and Freddie Mac, which are as follows:

Fannie Mae rental property refinance max LTV:

Type of Refinance Property Units Maximum LTV
No-Cash-Out Refinance 1-4 Units 75% LTV
Cash-Out Refinance 1 Unit 75% LTV
2-4 Units 70% LTV

Freddie Mac rental property refinance max LTV:

Type of Refinance Property Units Maximum LTV
No-Cash-Out Refinance 1 Unit 85% LTV
2-4 Units 75% LTV
Cash-Out Refinance 1 Unit 75% LTV
2-4 Units 70% LTV

The agencies used to enforce different LTV limits for adjustable-rate mortgages, but today those limits are the same as for fixed-rate mortgages.

Some lenders can only approve loans to Fannie Mae standards, some to Freddie Mac, and some to both. Shop around until you find the right lender for your situation.

Keep in mind, too, that many lenders are offering loans outside of Fannie and Freddie’s rules. That’s especially true nowadays, as the agencies recently capped the amount of investment property loans they’re willing to purchase from lenders. 

Lenders that offer non-conforming or ‘non-QM’ loans can make their own programs that are more lenient on LTV, cash-out, credit, and more.

If your scenario isn’t within the Fannie/Freddie “box,” one of these lenders could help.

Cash-out refinance waiting periods

Many home investors buy a run-down property with plans to fix it up. You may plan to fix-and-flip using a cash-out refinance to fund home improvements. 

While this is allowed, waiting periods apply.

You must wait at least six months between the home sale closing and the date you can close on a cash-out refinance. 

There are only a few exceptions to this rule, including:

  • The property was inherited
  • The home was legally awarded via divorce or other separation order
  • The cash-out refinance qualifies for the delayed financing exception

In addition, homes that have been on the market in the last six months have a lower allowable LTV for cash out refinancing, which maxes out at 70%. 

Investment property refinance rates 

Rates for a cash out investment property loan tend to be on the high end for mortgage rates. 

Why? Because investment property rates are higher to begin with — about 0.5% to 0.75% above primary residence rates on average

And if you take cash out when refinancing, rates are usually a little higher still. That’s because lenders take on more risk when a homeowner pulls equity out of their property. 

The best thing you can do when shopping for this type of loan is get rates from multiple lenders.

New regulations on investment property mortgages mean rates and fees could vary a lot by lender. So compare at least 3-5 loan offers to find the best deal. You could stand to save thousands on your new loan.

Compare cash-out refinance rates (Oct 16th, 2021)

Should I cash-out refi my rental property?

Cashing out equity is one of the best ways to profit from your investment property. 

Unused equity in the home may look good on paper, and for many investors, that’s fine. They have cash flow, and don’t want to increase their loan balance or monthly payments.

But a cash-out refinance rental property loan can put a good portion of the home’s value to work.

For instance, you might use the cashed out equity to:

  • Buy another rental property
  • Make home improvements
  • Pay off other real estate loans
  • Reduce personal debt
  • Stash away emergency cash 

Home improvements can yield a double-return. They increase the home’s value while justifying higher rent. And, tenants feel great about staying in the property long-term.

But perhaps the best use — and highest return — for cash-out funds is to expand a real estate investment portfolio.

For example, say you have a property worth $250,000 with a loan of $150,000. 

You can get a cash-out loan up to 75% of the current value, netting about $37,000. This money could be used to put 20% down on another rental home worth around $200,000. 

In this way, a cash out investment property loan can help build your real estate investing portfolio and your earning power through new rental income. 

Refinancing a rental property you bought with cash 

“Delayed financing” refers to the practice of buying a home with cash, then reimbursing the purchase with a refinance.

Because there are no loans on an all-cash home purchase, any subsequent refinance is technically a cash-out one.

Normally, the rental property home buyer would need to wait 6 months to get reimbursed per standard cash-out rules. That ties up a lot of cash for a long time — not the ideal situation for a savvy investor who wants to put their money to work elsewhere.

So, in mid-2011, Fannie Mae rolled out the “delayed financing exception.” Home investors may now receive a cash-out refinance just days — not months — after closing.

Guidelines for delayed financing are as follows.

  • The buyer paid all cash for the home
  • The buyer must document the source of funds for purchase
  • Loans or liens opened to buy the home must be paid off with the new loan
  • A title search must confirm no financing on the purchased home

Keep all documentation for the home purchase if you plan to use the delayed financing exception. Most importantly, keep a final Closing Disclosure showing your closing date and loan terms.

Verify your cash-out refinance eligibility (Oct 16th, 2021)

Cash out refinance on investment property FAQ

How do I pull equity out of my investment property?

You may be able to pull equity out of your investment property using a cash out refinance. For many landlords, this is a good strategy right now as refinance rates are near all-time lows. You may also be able to take equity out of an investment property using a home equity loan or home equity line of credit (HELOC). But this is more difficult to do than getting a second mortgage on your primary residence.

How much equity do I need for a cash-out refinance?

When you cash-out refinance an investment property, you must leave 25 to 30 percent of your home’s value untouched (depending on how many units the property has). That means you need significantly more than 25 to 30 percent equity to make cashing out worthwhile.  

How much are closing costs on a cash-out refinance?

Closing costs for a cash-out refinance are similar to closing costs on a traditional refinance: around 2 to 5 percent of the new loan amount on average.

Are rates higher for cash out refinance?

Yes, mortgage refinance rates are usually higher when you take cash out. That’s because the homeowner is taking out a bigger loan, and thus creating more risk for the lender. There’s no formula to tell you how much higher rates will be for a cash out refinance — to find out, you’ll have to check rates from a few lenders and see what you qualify for.

What is the max LTV on an investment property?

You need at least a 15-20% down payment to buy an investment property. That means the max LTV is 80-85%. For an investment property cash out refinance, the max LTV is 70-75% depending on your lender and whether the loan is fixed-rate or adjustable-rate.

Should I get a cash out refinance to pay off debt?

A cash-out refinance is a viable way to pay off debt, especially if you have lots of high-interest debt that’s sapping your income. Mortgage rates are currently near record lows, so by cashing out equity to pay off higher-interest loans, you can essentially consolidate all that debt under a lower interest rate. However, this strategy isn’t for everyone. Cash-out refinances have more stringent requirements than typical refinances — especially if you’re cashing out equity from an investment property. Whether or not this strategy will work for you depends on how much equity you have, your credit, your debt-to-income ratio (DTI), and other factors.

Is it hard to refinance a rental property?

It’s a bit harder to refinance a rental property than a property you live in. For one, credit requirements and LTV ratios are usually stricter. And your choice of loans and/or lenders may be limited — especially if you want a cash-out refinance on your rental property. However, it’s still doable for many. Shop around and explore your options to find a lender willing to work with you.

What are today’s cash-out refinance rental property mortgage rates?

Current mortgage rates are low — still half their historical norm of over 8%. It’s a limited opportunity to cash-out a rental property and perhaps find a lower interest rate, too.

Check today’s rental property refinance rates to see what you qualify for.

Verify your new rate (Oct 16th, 2021)