Cash Out Refinance After Renovation Question

[Albert W.]

Good morning BP. I'm coming to you for help to fully understand Cash Out refinancing. I know there are other posts on the topic, but for some reason my brain just can't wrap itself around the topic. I think i'm getting confused about paying off the original mortgage. In any case -- here's my dumbed-down scenario.

Let's say I have a 2 Unit building that I rehabbed, live in one unit, and am renting the second unit. I used my own cash as downpayment, and for renovations. I am weighing the options of:

1. A) selling the building
2. B) holding the building, renting both units, and cash-out refinancing to recapture my renovation funds and down payment.

The goal is to be able to move on to another project, but the problem is my cash is tied up in the building mentioned here. Option A is straight forward. I have questions about option B. I understand that banks will only refi out 75% of the ARV. Let's put some hypothetical numbers to it:

• Building purchase price of $300,000
• I used an FHA loan so i only put down $10,000 (Approximated -- just trying to keep numbers whole)
• Renovation costs were $90,000
• ARV is estimated at $500,000
• 75% ARV = $375,000

Here's my understanding of what happens next in Option B -- Please correct me if I'm wrong! Let's say the ARV is correct and the bank gives me $375k. My understanding is that this $375,000 is in ADDITION to the original mortgage, correct? One option I have is to use the $375,000 to pay off the original mortgage. Lets say the remainder of the mortgage amortized is $285,000 after having lived in it for one year. That leaves me with $375,000 - $285,000 = $90,000 Cash in hand. Now, although I haven't recaptured 100% of my cash that I originally started off with, I do still have equity in the property, and I have cash to use use on the next project, and I have positive cash-flow from the rentals.

Is this a correct understanding of an albeit dumbed down scenario?  Thank you in advance!

[Josh Mitchell]

@Albert W.

If you do a cash out refinance, the first mortgage is paid off and the new mortgage is open. So if you have a mortgage outstanding of 290k (300-10k), then you do rennovations to the place and it comes back at $500,000 and you are able to get $375k (75%), you will pay off the existing mortgage of $290k at the closing, along with the bank closing costs and be left with the balance. So 375k-290k-closing costs (dont know what they are in your area). I would imagine you would be left with about 80k cash out, and your new mortgage amount would be 375k.

Hope this helps clear things up a little bit for you.