Cash Out & Refinance Loans with Hard Money
What is a cash out refinance loan in real estate?
Do you have equity in real estate that you own? A cash-out refinance loan is a type of loan that allows you to take equity out of investment properties that you already own, in the form of “cash out.” Cash out refinance loans can be done for a variety of reasons, including business purpose, home renovations or repairs, new investment home purchases, for partner buyouts, and more.
The main benefit of taking a cash out refinance loan is that you can pull out equity from a property that you own and use it for specific purposes, such as those in the example above.
Cash Out Refinance Loans with Hard Money
Because of low credit scores, or insufficient monthly income, some borrowers are unable to qualify for a cash out refinance loan from a bank or credit union. A private money loan, sometimes referred to as a “hard money loan,” or private money mortgage, is a type of loan from a non-bank lender, rather than from a bank or from other traditional lenders. These loans are most commonly used in real estate investing but are used by all types of people for different purposes. A private money loan and hard money loan are interchangeable terms and mean the same thing, a loan against a hard asset like real estate.
Hard money refinance loans can be a great tool for real estate investors to purchase another investment property quickly. The cash out proceeds from the loan are used as a down payment on the new property being purchased.
Sometimes a cash out refinance using private money is appropriate and sometimes it’s not. Shortly we will discuss examples of when it’s appropriate and when it’s not appropriate to use hard money loans to fund cash out refinances.
The Importance of an Exit Strategy
Do you plan on selling the property to pay the loan back? Or will you refinance the hard money loan with another loan, later down the road? Private money loans are short-term loans, and are not intended to be used as long term financing. The loan terms of private money loans typically range from 6 months to 2 years. If you don’t have a diehard exit strategy for paying the loan off within 1-2 months, you probably should NOT get a private mortgage on any type of property.
Hard Money Cash Out Refinance Interest Rates
A cash out refinance loan will usually have a higher interest rate than a standard refinance with no cash out. And the interest rate for a hard money cash-out refinance loan will be higher than the rate for a traditional mortgage. Typical interest rates can range from 9% to as high as 12%.
Usually the higher the loan to value, the higher the interest rate will be. But the interest rate and costs for a cash-out refinance loan from a private lender can also vary greatly depending on the lender, on the loan to value, and on various other factors.
And these loans are short term so they are interest only payments, and not principal and interest payments. For example if your loan amount is $200,000 and the interest rate is 10% interest only, the monthly payment is calculated by taking the loan amount $200,000 x 10% and then dividing by 12 months, which give you a monthly, interest only payment of $1,666.67 per month.
Unlike a 20-30 year loan from a bank, an interest only payment doesn’t include a principal reduction payment, taxes, or insurance. This allows you to free up more cash flow, that you may need when you’re using the cash out proceeds to make an investment purchase or for business purpose.
How much does a refinance cash-out cost?
The loans fees that are part of any cash out refinance, from any lender including banks, are often called, loan origination fees, points, or even loan funding fees. The fees are usually between 1-3% of the loan amount. Loan fees are part of the total loan closing costs.
Real estate investors will often use a loan from a bank or credit union to purchase a new property, taking the cash out proceeds from the hard money refinance of the existing loan on the property to use as the down payment. They will later sell the property with the hard money loan on it, or refinance the property again at a bank or credit union later down the road.
Is there a difference in cash out refinancing from a private money lender and a direct hard money lender?
No, there is not a difference in cash out refinancing from a private money lender and a direct hard money lender. Both terms refer to a non-bank source of financing and mean essentially the same thing.
Why would you get a hard money loan to cash out instead of a conventional mortgage loan?
There are a few reasons why you might want to get a private money loan instead of a traditional mortgage. First, hard money loans tend to be easier to qualify for than conventional loans with looser underwriting guidelines.
And the time it takes for private money lenders to approve loans and fund them is much faster than a bank. This is important if you need the money quickly to purchase another investment property, or for other business purpose.
Once you refinance and existing loan to get cash out of a property, if you use a hard money loan, you will have a higher interest rate. Will the properties generate enough cash flow to cover the monthly payment at the higher loan amount, and the higher interest rate? Since hard money loans are short term and usually under 2 years in length, before you pull equity out of your property you need to have a plan for paying the loan back within 1-2 years.
What types of properties can I get a cash out refinance on?
-Multi family properties
-All Investment Property Types
Can I refinance my primary home with hard money?
As home values continue to rise across the U.S., many people are looking to take advantage of their equity by doing a cash out refinance loan on their homes. But many don’t qualify for traditional loans because they have income from investments and not W-2 income, or for other reasons.
Yes, you can refinance your owner occupied primary residence with hard money. However, your exit strategy is very key in determining if a private money loan is right for you to do a cash out refinance on your home.
In most cases, the answer is no, unless your exit strategy for paying off the private money loan is to sell the property, or if you plan to liquidate another asset to pay off the private money loan in a short time. If you don’t have an extremely certain, die hard exit strategy within a short period of time like 1-2 years, you should not refinance your primary residence with a private money loan.
Another crucial consideration is your purpose for the cash out funds from the loan. Your cash out loan purpose must NOT be to pay off credit cards, pay off other consumer debt, go on a vacation, pay for your child’s school tuition, etc.
Your purpose to cash out of a primary home is confined to very specific things such as improving the property for a higher resale price, to divest a partner out of a property in a divorce settlement for a short term, or for a specific business purpose. These examples are acceptable uses for a cash out loan on primary home, but to cash out of residential owner occupied property for any consumer-related use is prohibited.
What is the maximum loan to value for a cash out refinance?
How much equity can you take out of your property? Let’s say for example that you purchased a rental property for $200,000 6 years ago and now it’s worth $350,000. After the 6 years you’ve owned it, it has appreciated in value and you have a mortgage of $153,000 on it. You would like to purchase another investment property so you decide to get a cash out refinance on the existing investment property to cash out the funds needed for the down payment on the new property.
Most lenders will have an appraisal done on the rental property and then will base the new loan amount on a certain percentage of the appraised value. For example, if the home appraises for $350,000 and the lender give you 75% of that value as a new loan amount. You take $350,000 x 75% and you get $262,500. If you only owe $153,000 on the existing mortgage, that means you could cash out $109,500 ($262,500 which is the amount of new loan, minus $153,000 which is what you owe on the current loan).
In the above example, the lender will give you a cash out refinance loan for 75% of the appraised value of the existing property. However, some lenders will do lower loan amounts (like 65% of the home’s appraised value), if you have poor credit, or if the property is in an area with a small population size for example. But then some lenders may do a higher amount! Some lenders will lend up to 85% of the home’s appraised value on a cash out refinance. Ask your lender, what is the max loan to value you will do on cash out refinances of investment properties?
Are there Restrictions on a Cash-out Refinance?
Residential owner occupied properties do have restrictions on cash out refinances. If the cash out proceeds from the loan are being used for a consumer purpose, you cannot get this type of loan.
On residential rental properties, some lenders will want you to hold an investment property that you purchased for a “seasoning” period before they will let you do a cash out refinance on it. For example, some lenders want you to own the property for at least 6 months before they will do a cash out refinance. Ask you lender, what is the seasoning requirement if I buy an investment property and then want to do a cash out refinance with you?
What is the process for getting a cash out refinance loan?
The process for getting a cash out refinance from a bank or credit union can be tedious and time consuming. This is one definite benefit of using a private money lender to cash out of an investment property rather than using a conventional loan. Particularly if you are buying another property and need to move quickly to close on the purchase.
Many private lenders have a more straightforward process with less documentation requirements, they may not require tax returns, and often do not have a min credit score requirement. The process for getting a cash out refinance from a hard money lender is fast and painless, which is why many real estate investors use them over bank loans.
How long does it take for approval on hard money refinance loans?
Unlike traditional loans, it can take as little as 48 hours to get a loan approval for cash out refinance loans by hard money lenders. Once the loan is approved, the time until funding can be between 2-14 days.
Can you Refinance Reverse Mortgage Loans with Hard Money?
Private money loans can be an excellent tool to refinance reverse mortgages. When someone inherits a property with a reverse mortgage, they must decide if they want to keep the home or sell it. If they decide to keep it, they are obligated to repay the mortgage immediately. In this situation, you could refinance the reverse mortgage loan using a hard money loan because loan approvals happen quickly.
A hard money loan can help heirs to acquire a home. Once the heirs are on title to the home, they can either refinance the hard money loan with a conventional mortgage or fully renovate the home and resell it for a higher price. Because an older home may be dated and in need of renovation, by renovating the property, the heirs would be able to resell it later for a higher price. This is an example where a private loan is the perfect way to refinance reverse mortgages to maximize profit on an inherited property.
We evaluate each deal to make sure it’s a good fit for. If you’re looking for a cash-out refinance on one of your investment homes, reach out to us.