When to cash-out refi?

[Ryan H.]

In July of 2022, I purchased a SFH and obtained a 30-year fixed @ 6.75%. The property appraised for $30k more than the purchase price before improvements, and I then added a new roof, new AC, new carpet and flooring upstairs, a washer and dryer, and a bunch of general repairs. I'd like to pull cash out at some point to continue investing, and would also like a lower interest rate.

When would be an appropriate time to consider a cash-out refi?

[Jeff Copeland]

It really depends on how much equity you have, compared to the closing costs and rate/terms of the new loan. 

$30k isn't a lot (because you can only access 75% of it on an investment property refi), and capex such as roof and HVAC usually don't impress appraisers in terms of adding value to the home (these are just things that all homes have that need to be replaced at certain intervals, they aren't really much of an improvement in terms of appraised value). 

For argument's sake let's say you paid $300k, put 25% down, financed $225k of the purchase, it appraised for $330k, and it's now worth $350k. 

You could pull out $262,500 at 75% LTV (75% of the current value of $350k)

After paying off your current mortgage balance (let's assume you now owe $220k after making several months worth of payments), you'd have access to $42,500 in equity. Minus closing and origination costs on the new mortgage. 

If your closing costs are $7,500, that's 17% of your available equity eaten up by the refi costs. It might make sense to wait until you have more equity. 

Then again, it also depends on what you plan to do with the remaining $35k. If that enables you to invest in something else that is a home run, then it might be worth it. Only you can decide. 

But, as you can see, the closing and origination costs are a huge factor when you don't have a ton of equity to pull out. 

A couple of other factors to keep in mind:

1. Rates are in the low 6's right now, so getting a lower rate is unlikely (at least not low enough to justify the costs or save you any significant money). If/When you can get a lower rate, this often justifies the closing costs on the new loan (if you can recoup them through lower interest payments within 2-3 years, for example). This does not appear to be the case for you right now.

2. Your old appraisal is irrelevant. The lender will have to order a new one, and not only has the market changed a lot since last year, appraisers also tend to be more conservative on refi appraisals. So it's possible you end up spending $600 or so on an appraisal only to find out you don't have as much equity as you thought.