Real estate can offer great returns, long-term security, and protect you from inflation. In addition, owning a property puts you closer to mortgage-free living. But a primary residence isn’t the only way to enjoy these benefits.
An investment property or second home could increase your real estate net worth, too — helping you achieve financial goals sooner.
These types of properties can diversify your investments and provide long-term profits. But while real estate might be a smart investment strategy, financing an investment property and second home isn’t as easy as financing a primary residence. Lenders typically require a higher down payment, as much as 10% to 25%.
The good news is that you don’t have to drain your savings to purchase either property. A cash-out refinance might be an option, depending on the equity in your current home.
Here’s what you need to know about using a cash-out refinance to buy a second home or investment property.
What is a cash-out refinance?
Mortgage refinancing involves replacing an existing mortgage loan with a new one. The new loan often has different terms, such as a lower interest rate, a longer or shorter length, and a new monthly payment.
Some homeowners refinance with the sole purpose of lowering their interest rates and monthly payments. This is called a rate-term refinance. But you can also refinance and borrow cash from your equity (cash-out). This involves borrowing more than your current mortgage balance (thus increasing how much you owe).
You can use funds for anything you want such as home improvements, debt consolidation, and education expenses. In addition, you can leverage the equity in your home to start investing in real estate — instead of using your personal savings.
The money can go toward the down payment on an investment property or second home. You could also use funds to pay cash for a property.
How to qualify for a cash-out refinance?
Equity alone isn’t enough to qualify for a cash-out refinance. You’re replacing an existing mortgage, so you must complete a new home loan application and meet the minimum requirements for approval.
Things to know before applying for a cash-out refinance:
Keep in mind that using a cash-out refinance to buy a second home or investment property will involve closing costs. These are lender and third-party fees paid at closing (loan origination fee, title search fees, attorney fees, prepaid fees, etc). Closing costs can range from 2% to 5% of the loan amount.
The equity pulled from another property can help cover these expenses too.
To save money, you can possibly lower your closing costs by negotiating fees with the lender or asking for a lender credit. This involves paying a higher mortgage rate in exchange for the lender waiving all or some of your closing costs.
Whether you’re ready to diversify, earn passive income, or enjoy more quality time with your family, an investment property or second home could help you achieve your goals. Contact the loan experts at FirstBank Mortgage for information on how to leverage the equity in your home.