Define Cashout Refinance

[Craig Price]

Can someone define what Cashout refinance is and give an example? I'm sorry if this is basic knowledge but I'm new to all of this and want to make sure I understand this strategy.

[Frank M.]

At its simplest, you buy a house for $100K, 20% down. Years later it's worth $160K and you go to the bank looking to borrow 75% or $120K. $40K cash pulled out.

[John Hicks]

Let's say you purchase a house for cash at $30,000 and put $10,000 in rehab. Now the house will appraise for $75,000 and you go to the bank and get a mortgage for $55,000 and at closing you get the "cash " out in the form of a check to you at closing, in effect netting a $15,000 profit.

Done exactly that two times.

[Matt Devincenzo]

Any refinance that is made that delivers more cash than required to pay off the underlying debts currently on the property. So if you have a free and clear house you want to get a loan on....cash out refi. If you wait for years until it appreciates and pull out that equity....cash out refi.

It just differentiates it from a rate and term refi. The purpose there is to adjust the loan terms whether it be because interest rates are lower than your old loan, or you want to lower your payment by extending the term back out to 30 years or....

A cash out refi will be a slightly higher interest rate than a rate and term refi, and the underwriting for it may be just slightly more stringent otherwise it works the same way.

[Frank M.]

Originally posted by @John Hicks:

Let's say you purchase a house for cash at $30,000 and put $10,000 in rehab. Now the house will appraise for $75,000 and you go to the bank and get a mortgage for $55,000.

May I ask, how quickly after the rehab were you able to do the refi?

[Stan Butler]

Originally posted by @Frank M.:

Originally posted by @John Hicks:

Let's say you purchase a house for cash at $30,000 and put $10,000 in rehab. Now the house will appraise for $75,000 and you go to the bank and get a mortgage for $55,000.

May I ask, how quickly after the rehab were you able to do the refi?

That is referred to as title "seasoning". For a portfolio loan, I have worked with several community banks that don't require any seasoning to cash-out. For conforming loans, I think they each have their own time period. After the title has "seasoned" the V in the LTV can be the appraised value instead of the purchase price.

[Jeremy Williams]

Just curious. What are the costs of these? 3-5%?

[John Hicks]

@Frank M. May I ask, how quickly after the rehab were you able to do the refi?

These were done at the tail end of the glory days in 2007/2008. Closed, rehabbed and cashed out in about 90 days. I haven't tried it since then so I don't know how long it would take with all the new rules and regs.

[Richard T.]

As the others were saying it's taking equity out of a property you have. You can use to leverage money for more investments or whatever you need. It is important to note that you can only take out enough that you still have 20% down on the property.

For example if you had a home that you had a property that cost $100k downed $20k and after a while the property stayed the same value at $100k but you only owe $75k, you can "cash out" the $5k that you paid into the loan placing you at $80k owed again. Although there are costs to refinance too. But that makes things a little more messy.

[Frank M.]

Originally posted by @John Hicks:

Closed, rehabbed and cashed out in about 90 days. I haven't tried it since then so I don't know how long it would take with all the new rules and regs.

Thanks, John. I'll be patient, and after the place is rehabbed and filled (3 units), I'll ask the bank contact what she'd like to see for seasoning. Before reading this thread, I was guessing 90 days might make sense, but thinking 3 month's rents coming in, so more like 6 mo from closing to refi. Curious what others have seen more recently.

[Franklin Romine]

The beauty about cash out refinance is it's a tax free pay day.

[Matt Devincenzo]

@Frank M. it depends on what type of loan it is, and I'd ask about the seasoning before rehabbing since I always want to know my timelines proactively not reactively.

If you're looking at conventional Fannie/Freddie loans then they have a 0 day seasoning "delayed finance" product available to get up to the purchase price out on a cash purchase.

Other FF loans require 6 months seasoning, and individual lenders may have their own overlays that require more.

Portfolio loans the bank has their own requirements that they get to decide and it can be immediately if they choose to.

[Bill Gulley]

A cash out refinance is any mortgage funded that allows the borrower to receive more than $100.00 after settlement.

There is no requirement as to paying off other liens, but it may, nor to time limitations of being in title (as to cash out refi) as it's to receiving funds at any time of ownership from that loan.

Any lien or loan that provided cash to the borrower within 6 months being paid off by the new loan may be considered a cash out even if cash is not received from that loan new loan. :)

[Michael Cerny]

Originally posted by @Franklin Romine:

The beauty about cash out refinance is it's a tax free pay day.

In the same way that any loan is a tax free pay day.

[Frank M.]

Originally posted by @Matt Devincenzo:

@Frank M. it depends on what type of loan it is, and I'd ask about the seasoning before rehabbing since I always want to know my timelines proactively not reactively.

Understood. In my case, the cash-out isn't necessary for this deal, it would be useful as I target the second purchase. I made the first purchase assuming no financing, which is part of why my low offer was accepted. A higher offer had a financing clause and it looked like the seller risked wasting too much time waiting for that, so they accepted mine. Now, I'll just be patient and contact bank after it's fillled.