If a rental has gone up in value or you have paid the balance down, you may be sitting on equity that could fund your next purchase. A cash-out refinance replaces your existing loan with a new, larger one and gives you the difference in cash. With a DSCR loan, the new loan is qualified on the property’s rent rather than your personal income.
A simple example
Say a rental is worth $400,000 and you owe $200,000. If a lender allows up to 70 percent of the value on a cash-out refinance, the new loan could be as high as $280,000. After paying off the $200,000 balance and closing costs, the remainder would come to you as cash. The numbers here are only to show the math. Your actual limit depends on your credit, the property and the program.
What lenders look at
- Appraised value. The new loan is based on what the property appraises for, so the appraisal matters a great deal.
- Loan-to-value. Cash-out refinances usually allow less leverage than purchases or rate-and-term refinances.
- The DSCR. The rent has to support the new, larger payment. A bigger loan means a bigger payment, so the ratio can tighten.
- Credit and reserves. Better scores generally mean better pricing and more flexibility.
- How long you have owned it. Some lenders want you to have owned the property for a minimum period before a cash-out, so ask early if you bought recently.
Common uses for the cash
- A down payment on another rental or flip. This is the heart of the BRRRR method.
- Renovations that raise the rent or the value.
- Paying off a higher-cost short-term loan, such as a bridge loan.
- Building cash reserves.
What to weigh before you do it
- Closing costs. A refinance has costs. Add them up so you know your real net proceeds.
- A larger payment. Make sure the property still cash flows comfortably after the refinance, not just on paper.
- Prepayment terms. The new loan may carry a prepayment penalty. See our guide to DSCR prepayment penalties.
- Your plan for the money. Pulling cash out only makes sense if the next use earns more than the new loan costs.
Run your numbers first
Start with the DSCR calculator using the new payment, then try the estimator for a ballpark rate and loan amount. A loan officer can confirm the maximum for your property.