Buying an investment property or a second home is a big expense. You do not want to postpone receiving passive income or wintering someplace warm any longer than you have to but saving up the capital to make such a large investment can be a daunting task, to say the least.

In situations such as these, your best option may be a cash-out refinance. This type of mortgage refinance allows you to access the equity you already have in your current home, which may have been created by market appreciation, the monthly mortgage payments you have already made to your principal, or a combination of both.

What Is a Cash-Out Refinance?

A cash-out refinance does not function as a second mortgage. A second mortgage would double the number of mortgage payments you make each month, a cash-out refinance enables you to borrow more than the amount of money you currently owe on your mortgage, pay off and replace your existing mortgage, and then keep the additional funds.

An example would be. Suppose you purchased your home for $250,000 some years ago. Since then your home has appreciated to $300,000. You have paid your current mortgage down to $125,000. At this point, you would have $175,000 in equity in your home. When you are taking cash out you can only borrow up to 80% of the current value of the home. This would allow you to take $115,000 in equity out of your home. ($300,000 x 80% = $240,000 – Your new loan would be $240,000 – $125,000 (your current loan) leaving you the $115,000 in additional funds available to you).

Cash-out refinances are by no means limited to purchasing second homes or investment properties. They are also often used to pay for home renovations, medical bills, and other major expenses which people would rather incur by utilizing their existing equity instead of credit cards or personal loans. Cash-out refinances are also used to consolidate debt.

How Does a Cash-Out Refinance Differ From a Home Equity Loan?

In addition to replacing the borrower’s original mortgage rather than creating a second one, a cash-out refinance can come with a lower interest rate than the loan it replaced. Unlike a home equity loan, however, with the cash-out refinance the borrower pays higher closing costs associated with the mortgage refinance.

How Much Can a Cash-Out Refinance Be Worth?

The value of your cash-out refinance will largely depend on your home’s market value. Once you have received a property valuation to determine that amount, your lender will typically grant you a loan for most of your home’s value – typically no greater than 80%.

How Does a Cash-Out Refinance Work?

Receiving a cash-out refinance is similar to receiving a standard home equity loan. The process can be broken down into three steps:

1. Determine whether you qualify. Each lender has its own requirements. A lender will typically grant a cash-out refinance to a borrower based on credit score, debt-to-income ratio, and equity in their home.

2. Determine the amount of money you need. If you qualify for a cash-out refinance, it is important to know the amount of money you will want to borrow in addition to the value of your equity. For example, if you currently have $200,000 equity in your $400,000 home and need an additional $100,000 for an investment property, then you will want to borrow $300,000.

3. Find a lender and apply. Once you believe a cash-out refinance is the option for you, you need only find and apply with a lender. They will request information such as pay stubs and tax returns so that you meet their criteria.

Sherburne State Bank Can Help You Get a Cash-Out Refinance

As one of Minnesota’s leading providers of mortgages and home loans, Sherburne State Bank is qualified to grant you the cash-out refinance you need to earn that passive income or enjoy a second place to live. With locations in Becker, Monticello, and Princeton, meeting in person with one of our specialists is easy. We welcome you to contact us for a consultation today!

You are now leaving Sherburne State Bank's website

Sherburne State Bank provides a link to this external webpage because it may contain related information of interest to you. This link does not constitute an endorsement by Sherburne State Bank of any information, products or services on this external website.