Cash out refinance example

[Account Closed]

Hi

I'm looking to buy a 2nd rental property out of state in Ohio. I'm trying to figure out a way to put little to no money down for the loan. I can't do FHA since I wont be living in the property. I wanted to get a better understanding of what is cash out refinance. I did read about it in one of Biggerpockets books. I read about it on google. It still doesnt make sense to me. Can someone pls explain to me in an example with numbers? I know it means refinancing your existing property. But what is cash out mean? Do you have pay that back with the refinanced loan? The lender just gives you excess cash that you dont have to pay back? Thats the part I dont get. For ex, lets say I wanted to borrow money from my 401k for down payment and I take out a loan for the remainder. Then if I do cash-out refinance later, the lender will give me money to pay back my 401k and I dont pay him back for that? Sorry If I sound stupid but I really want to understand this concept. Thanks in advance.

[Erik Estrada]

Quote from @Account Closed:

Hi

I'm looking to buy a 2nd rental property out of state in Ohio. I'm trying to figure out a way to put little to no money down for the loan. I can't do FHA since I wont be living in the property. I wanted to get a better understanding of what is cash out refinance. I did read about it in one of Biggerpockets books. I read about it on google. It still doesnt make sense to me. Can someone pls explain to me in an example with numbers? I know it means refinancing your existing property. But what is cash out mean? Do you have pay that back with the refinanced loan? The lender just gives you excess cash that you dont have to pay back? Thats the part I dont get. For ex, lets say I wanted to borrow money from my 401k for down payment and I take out a loan for the remainder. Then if I do cash-out refinance later, the lender will give me money to pay back my 401k and I dont pay him back for that? Sorry If I sound stupid but I really want to understand this concept. Thanks in advance.

 When you refinance this is what happens: 

You pay off your existing mortgage and replace it with a new mortgage. 

This means that your new lender pays off what you owe and issues you a new loan. 

When you do a cash out refinance you take on a bigger loan. So for example, You owe, $300,000 on a property worth $1,000,000. If you do a 75% LTV cash out refinance, This means you are borrowing $750,000 instead of $300,000.

Once you subtract your existing mortgage ($300,000) with your new one ($750,000): Your cash out is $450,000.