Cash Out Refinance
Replacing an existing mortgage with a new larger mortgage and taking the difference as cash.
Definition
A cash out refinance is the tool that turns trapped equity into deployable capital. You take out a new mortgage larger than your existing loan balance, pay off the old loan, and keep the difference as cash at closing. For BRRRR investors, this is how you recycle capital from finished deals into the next purchase. For buy and hold investors, it is how you pull equity out of appreciating properties to buy more without selling. Most investment property cash out refis cap at 70 to 75% LTV. The rate is typically 0.25 to 0.75% higher than a rate and term refi. You pay closing costs of 2 to 4% of the loan amount. The cash you pull out is not taxable income because it is loan proceeds, not profit, though you will eventually pay it back with interest. The decision to cash out refi comes down to whether the rate of return on the new deployment exceeds the cost of the new debt plus the impact on monthly cash flow.
Formula
Example
Old loan balance is $95,000. New loan at 75% LTV on a $200,000 appraised value is $150,000. Closing costs are $4,500. Cash out proceeds = 150,000 - 95,000 - 4,500 = $50,500.
Frequently asked
Is cash out refinance money taxable?
No. Loan proceeds are not income. You eventually pay it back with interest, which may be deductible.
What is the maximum LTV on a cash out refinance?
Most investment property cash out refinances cap at 70 to 75% LTV. Owner occupied goes higher.
Should I cash out refinance to buy another property?
Only if the return on the new deployment exceeds your new cost of debt plus the reduced cash flow from the higher payment.
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