How to Refinance a Property to Pull Equity Out

Question

I always hear people talk about refinancing a property, not for a lower rate, but to cash out their equity? Can someone explain how this works or give me an example? I don't understand how it works. I do understand refinancing with a lower rate.

John Warren · Answer

@Daniel Sabato when you do a cash out refinance you get a higher appraised value then when you purchased the property. Lets say you purchased for 150k and have a mortgage balance of 100k, but now your value comes in at 200k. Most banks will lend on 75% or so of the appraised value. In this case, your new mortgage would be 150k (75% of the appraised value). This means that you pay of the first mortgage of 100k, and you walk away with 50k of tax free money.

Technically, your 50k is not income or gains because it is loaned to you by the bank. For your purposes, this cash is free and clear and can be used for further investing or even for personal use. I have always used this strategy as it allows me to buy more properties.

Corby Goade · Answer

@James De Stefano Lol, we DO have the most amazing blue turf here! Yes, competition and appreciation here have been crazy. 15% average appreciation over the last two years- that can help you scale a portfolio pretty quickly- I've had many clients who have done insanely well.

I love Houston too- I've had some of the best meals of my life there- fun city!

Holler at me if you ever want to visit- I'll get you out on that turf, once in a lifetime experience!

Matt Nico · Answer

@Daniel Sabato - No, a HELOC is very different than a refi for a better rate. A "Cash out refinance" is where you cash out your money 1 time and your loan period restarts.

Lets say I did the cash out refi on my last example:

$200,000 mortgage. I refinance it to a mortgage of $260,000, where the bank gives me the $60,000 (minus closing costs), and I have a new 30-yr fixed mortgage at 260k, but with $60k in my pocket. My monthly payment goes up. My interest rate will change.

Now lets say I use a HELOC:

$200,000 mortgage. The bank lets me borrow up to $260,000. So they give me a line of credit on my house for $60,000, with the original $200,000 mortgage staying the same. It works like a credit card....when I want it, I use it. When I dont want it, I dont use is, but its still available. Usually HELOC's have a 10-year draw period. Interest only payments. Think of it as a credit card using your house.

Matt Nico · Answer

@Daniel Sabato sure I'll explain it using one of my own properties. Here you go:

A few years ago, I bought a house for $225,000. I put a bit of money into it to fix it up a good amount (granite countertops for example of one thing I did), and then I rented it out. Over the past 3 years, my tenants have paid my mortgage down to $200,000. So I bought it for $225,000, but the mortgage is down to $200,000. With all of the upgrades that I have made to the house, as well as the houses in my neighborhood going up in value, in 3 years the house has gone up in value to being worth $325,000.

So I owe $200,000 on a house worth $325,000. This means I have a lot of equity in it. So now enter in the Home Equity Line of Credit (HELOC). I call a bank up, and I tell them "Hi, I have a house worth $325,000 that I want to pull money out of to use for something else. I have a mortgage for $200,000." The bank says "Okay, we can get that done for you. We will allow you to pull 80% of the total equity of your house out for you to use."

80% of $325,000 is $260,000. So they will let me borrow up to $260,000. My house has a mortgage of $200,000 on it.

So $260,000 - $200,000 = $60,000.

So the bank will let me borrow $60,000 using my house as the collateral. And I can deploy that $60,000 to do with what I want.

Hope this helps,

Matt

Max Versteppen · Answer

Conventional loans require you to leave between 15-20% equity in your home after a refinance, and FHA loans require at least 15%. The only exception to this rule is with a VA loan refinance, which doesn't require you to leave any equity after you refinance.

Samuel Pavlovcik · Answer

Thanks to all who have posted. This is great information for those new to REI

Corby Goade · Answer

You can do both- buy in an appreciating market and make updates/upgrades. In my market, you can do this and create $50k in equity pretty quickly, which is a down payment on the next deal. All of the sudden, you are picking up new investments without having to save $50k.

JC F. · Answer

@John Warren please connect me we with a good lender for a cash out Refi loan.  Do you know what terms and rates are being offered during this Covid-19 times ?

Daniel Sabato · Answer

@John Warren Thank you for the info John, huge help!

Daniel Sabato · Answer

@Matt Nico Perfect example, thank you Matt. Not that different than refinancing for a better rate. How do you decide that the property is now worth X amount of dollars? Do you get an independent appraiser to look at the property for you?

How to Refinance a Property to Pull Equity Out

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