Taking a cash out refi advice for a rookie

[Steve Bell]

My partner and I recently bought and rehabbed and furnished our 1st STR. Had my real estate agent come by to take a look at the finished project and got her unofficial opinion about the value of our new vacation rental.

She said that it could easily sell for $90 - $110k more than what we purchased it for. Given that analysis we think it would be worth it to try to get an appraisal and do a cash out refi, so we can pay back the HELOC we used for the downpayment, rehab, and furnishing costs.

I have a couple questions for the BP community.

1. Would anyone hesitate or have any reason NOT to get the loan refinanced other than getting an enormous interest rate hike on the new loan? Keep in mind we bought in Jan 2023 and our interest rate is a 6.625%. I have not looked at latest rates, but I know this is not anywhere close to the 2-3% rates we enjoyed just a short couple of years ago.

Another piece of info I neglected to mention, we received a second home loan on this property from our lender so we only put down 10% of the purchase price. 

2. Because we only put 10% down should we expect after a cash out refi that the lender will refi this into a conventional loan and expect 20% be left in? Would there be anyway we could ask for the refinanced loan to be a second home loan and we could get 90% LTV with the new terms?

3. If we did a cash out refi, will the lender be looking for the new % to be left in figured from the “Original” purchase price or would it be calculated from the newly “appraised” price?

Thanks in advance for any and all advice!!

[Doug Smith]

Awesome! It sounds like you hit a home run on your first deal. Rates have climbed since January, so refinancing the first mortgage might not be in your best interest right now. As of right now, Mortgage News Daily has the National Average 30-Year Fixed Rate for OWNER-OCCUPIED property at 6.90%. Fannie Mae and Freddie Mac are trying to limit their exposure to the investment business, so they have added Loan Level Pricing Adjustments (LLPAs) to their pricing. It's going to be well over what you're paying now. DSCR deals will certainly be higher, but with pretty much any lender, until after you've owned the property for six months, they are going to use the LESSER of the purchase price or appraised value anyway. Even with only 10% down, it sounds like your equity is high enough to get you a solid cash-out amount if you can wait until the 6 month mark...which is coming up soon...but the rate's going to be a couple of points higher than here you are now. Cash-Out Refis are going to have LTVs at about 5% less than what a purchase would be. I would count on 70% - 75% LTV Max on a Cash Out Refi of an Investment Property right now. HELOCs are hard to come by on investment property. Some may do it, but most stick to consumer property instead of investment. There aren't great options for you, but you do have options if you wanted. Now I have to put my Investment Hat on (yes, I own a lending company, but we're an investor too). We started by flipping to get $ in the coffers and held one every once in a while. We didn't hold everything we did so could generate capital in the beginning. What would happen if you flipped it to garner cash for more projects? Just a thought. I hope all goes well for you.