Cash-Out Refinance to Buy a Second Home: Is This the Move for You?
Published May 27, 2022
If you're able to afford two mortgage payments, buying a second home for your own use or as an investment property can be a wise financial decision. Property is generally a great investment, so you might feel eager to purchase another home once you have the financial means to do so. However, funding the down payment may be your biggest obstacle.
Some homeowners consider completing a cash-out refinance to buy second homes if they've built up enough equity in their current property. In some cases, it's a great idea to cash-out refinance second homes. Other times, though, this option is not ideal. Anyone considering a cash-out refinance to buy second homes should understand how cash-out refinancing work, as well as the pros and cons of using the cash for this reason.
Is it possible to use a cash-out refinance to buy second homes?
If you have enough equity in your home to complete a cash-out refinance, it is possible to refinance your first home to buy a second property. Most lenders allow you to borrow up to 80% of your home's appraised value in a cash-out refinance. The funds from your new mortgage will first pay off your previous home loan. Then, you'll receive any additional money from the refinance in a cash payment.
The amount of cash you can receive from your refinance depends on how much equity you've built up in your home. If your current mortgage amounts to 80% of your home's appraised value, you will likely break even on your new mortgage. However, if you only owe 60% of your home's appraised value, you could take out a new loan for 80% of the value and receive the 20% difference in cash. Then, you could use this cash for a down payment on a new property.
When you should use a cash-out refinance to buy second home
A cash-out refinance can be a good way to access funds for a down payment, but this is still debt that you must pay back. Homeowners should only cash-out refinance second homes under certain circumstances to avoid becoming overwhelmed with financial obligations.
You could benefit from a cash-out refinance if you have a sizable amount of equity in your current home. For some homeowners, this means they've been making payments on the house for years, or even decades. For others, this means that the home has dramatically increased in value since they purchased it.
You should also pay attention to the current mortgage interest trends. Refinancing when interest rates are high is rarely a good option, especially if your original interest rate is lower. If interest rates have declined, now could be an excellent time for a cash-out refinance. Not only can you take advantage of the lower rates to reduce the monthly payment on your first home, but you could also buy your second home in time to lock in a low interest rate.
No matter the current market conditions, though, you must be certain that you can manage two mortgage payments. Rushing into a major purchase just because rates are low is a risky move. If you're sure that you can handle two house payments without stretching your budget, you can proceed with your refinance.
If you’re unsure whether a cash-out refinance is a smart idea to fund a second home, schedule an appointment. We can walk you through current market trends, review your mortgage documents, and provide personalized advice. You don’t want to second-guess your choice to do a cash-out refinance. We can help you feel more confident, no matter what you decide.
When you shouldn't use a cash-out refinance to buy second home
You should not use a cash-out refinance for a second home if you're at all concerned about affording the closing costs or your new mortgage payments. When you complete a cash-out refinance, you increase your existing mortgage balance. Unless you drastically decrease your interest rate, your monthly payment will likely increase.
If you already have the cash available to fund a second home purchase, you may not need to refinance your current property. It's almost always better to make a down payment in cash than to take out a loan to cover the expense.
If you're unsure of whether a cash-out refinance to buy second home is a good option, you can reach out to your lender to discuss the specifics of your situation. Lenders like American Financing protect themselves when they provide you with options that are financially feasible for you. For this reason, among others, we can be a great source of sound advice.
How to apply for a cash-out refinance
Different lenders have different requirements for cash-out refinancing. Reach out to us to learn more about our specific cash-out application process. In this conversation, we’ll also discuss whether a cash-out refinance is the best choice to fund your new real estate venture.
In general, lenders like to see a credit score of at least 620 for a cash-out refinance, so the credit requirements are somewhat stricter than they are for first-time mortgages. You should also have a debt-to-income ratio of 43% or less. If you have personal loans, student loans, or credit card debt, you may need to pay down these accounts before you qualify for a cash-out refinance.
When you apply for your cash-out refinance, you should be ready to provide proof of income and assets as well as proof that you've consistently made your mortgage payments on time. You will need to show a variety of financial documents and will conduct a credit check to make sure you meet the qualifications of the mortgage.
Alternatives to a cash-out refinance to buy a second home
Instead of using a cash-out refinance to buy second homes, homeowners may opt for a home equity loan. A home equity loan provides you with a cash payment of up to 85% of the current equity in your property. This is very similar to a cash-out refinance, but it can be a better option if mortgage interest rates are high or if you want to avoid paying a lot in closing costs.
Another option is to take out a HELOC, or a home equity line of credit. While a home equity loan provides you with a lump-sum payment, a HELOC is a line of credit that you can continually tap into until you've reached the limit. Once you reach the end of the loan's draw period, you begin repaying the principal of the loan plus interest.
For homeowners who have enough equity, a cash-out refinance to buy second homes may be the right investment. Refinancing and buying a second property are both major financial decisions, though, so you should only go through with this type of refi if you're confident that it's the right choice. Chat with us to learn more about your options