Complete Guide to Using a Cash-Out Refinance Calculator

There are many reasons people decide to refinance their properties. Real estate investors may be looking for ways to free up capital or clear a mortgage before starting work on the next project, and a cash-out refinance loan is one of the ways to do it.

The following provides all the information you need about this type of transaction, how to calculate it, and how it can be leveraged in the real estate and rental property business.

What Is a Cash-Out Refinance?

A cash-out refinance is a way to refinance a mortgage on a property. It essentially means paying off your current loan balance with a larger loan amount in cash- potentially leaving some capital left over for you to use for whatever you see fit.

Usually, cash-out refinance loans have a 30-year repayment schedule- usually with a lower interest rate than the original mortgage. People often use them as a way to tap into their home equity for repairs, renovations, new property investments, or large expenses. It is also a way to consolidate debt.

Cash-out refinancing comes with the same closing costs as a regular mortgage, which comes out of the leftover lump sum once the first mortgage is repaid.

What Does a Cash-Out Refinance Calculation Look Like?

A cash-out refinance calculator tells you three main things (although some offer fewer or more details depending on the information you put in.

• If you are likely to qualify for a cash-out refinance

Your loan-to-value ratio should usually not exceed 80% for a cash-out refinance, meaning you must have at least 20% equity in your home. In other words, if a property is worth $100,000, you can't have a total loan amount outstanding of more than $80,000, including the refinance.

That part of the calculation looks like this.

(Current mortgage balance + Cash-out amount) ÷ Current market value of your home

Let's say your property is appraised at $500. If you still have $150,000 left on your mortgage and want to take out a cash refinance of $200,000, the first calculation in your cash-out refinance is as follows:

($150,000 + $200,000) ÷ $500,000 = 70% LTV ratio

Once you establish that your LTV ratio is below 80%, you can move on to the next part.

• Estimated monthly mortgage payments for your refinanced loan

The next thing a cash-out refinance calculator will show you is the amount you can expect to pay in mortgage costs each month if you move ahead with the refinance.

This calculation is based on the amount you want to borrow and the loan term you choose (15 years, 30 years, etc.). What exactly this calculation looks like depends on the data you input, but the calculator takes care of the complicated math on your behalf.

What Factors Affect Cash-Out Refinancing?

Before looking into calculating what you may qualify for and how much you should expect to pay, you need to understand all the influencing factors that go toward determining cash-out refinance eligibility and rates.

Here are some of the variables in this type of mortgage refinance calculator and the things that affect them.

Outstanding Existing Mortgage Balance

Some people mistakenly believe that having a big mortgage balance means you can't refinance with a cash-out deal, but that is not necessarily true. As long as the combined value of your existing mortgage balance and the amount you want to borrow don't exceed 80% of the property's current market value, you should qualify.

If your property is valued at $1 million and you have $300,000 still to pay on your principal loan, you could (in theory) be approved for up to $500,000.

A cash-out refinance lender will rarely lend an amount that, together with the existing loan balance, exceeds 80% of the appraised value, but there are some exceptions with FHA loans and Department of Veteran Affairs loans.

Loan Term

A mortgage refinance calculator will estimate how much your monthly payments are likely to be if you opt for a cash-out refinance based on the amount you want to borrow and how much equity you have in the property so far- but it also needs to know how long you want to be repaying the refinance.

It all sounds complicated, but it is actually quite simple. When you refinance a mortgage- it effectively replaces the original loan, and the same things need to be established. Just like your original mortgage, you need to decide how many years you want to loan repayments to last.

Shorter-term refinance loans cost you much less in interest in the long run but come with a higher monthly payment amount. The monthly mortgage payment costs on cash-out refinances vary the same way they would on a standard mortgage.

Insurance, Taxes, and Fees

Some of the additional factors you can input into most cash-out refinance calculators include:

• How much you pay in property taxes
• Your home insurance costs
• HOA fees
• Your current mortgage rate or the rate you have seen quoted from a potential lender

Each of these will impact your monthly payments after you refinance a mortgage. The rates given by online calculators are estimated based on the information available to them, but you won't know the exact payment schedule until you work out a deal.

Credit Score

The general rule of thumb for a conventional cash-out refinance is that you need a credit score of at least 620 to be considered for cash-out refinances. This is not an absolute certainty, as some lenders will approve loans to people with scores as low as 580.

That said, the lower your credit score, the higher interest rates you are likely to get on your loan. Some mortgage lenders only accept scores above 650 or 700- it all depends on where you look.

Debt to Income Ratio

Lastly, most lenders require you to have a debt-to-income ratio of less than 50%. This means that your monthly debts can not be more than half of your monthly earnings.

Cash-Out Refinancing in Real Estate: How to Leverage Cash-Out Refinancing in Your Rental Property Business

Here are a few examples of cash-out refinancing that can be utilized in real estate and the rental industry.

To Pay for Major Repairs

Buildings can bring about major expenses- often unexpectedly or at a bad moment. Replacing your roof or fixing a cracked foundation, for example, can cost tens of thousands of dollars. Sometimes, instead of taking out a home equity loan, property investors prefer to refinance a mortgage.

If you are facing major repairs or renovations and are looking for the best way to finance it, you should compare your options. You might be surprised to find that it makes financial sense to refinance rather than take out a different type of loan.

To Consolidate Debts

Sometimes, rental property investors have several small loans as well as their mortgage- either for repair work, construction debt, or other loans relating to their properties.

Rather than having multiple loan payments to keep track of- and paying interest on them all, you can consolidate it all into one.

How?

By taking advantage of a cash-out refinance, you can pay the balance of your original mortgage and use the lump sum remainder to pay off the rest of your outstanding loans (as long as you qualify for enough to cover it all).

That way, you have one monthly payment to worry about- and you only pay interest once- albeit on a larger loan.

Mortgage refinancing usually gets you a better interest rate than most personal loans or home equity loans, so you could find you save money overall.

As part of a BRRRR Investment Strategy

Refinancing is the second-last R in the BRRRR method- specifically cash-out refinancing.

In a BRRRR investment strategy, people buy properties below market value, rehab them, rent them out, refinance them, then use the leftover balance from the mortgage repayment to buy their next property.

If you are looking to grow your rental portfolio, are not afraid of some renovation work, and can stick to a budget, this could be a strategy worth considering- and a great way to leverage cash-out refinancing for the benefit of your business.

What Is a Good Amount for a Cash-Out Refinance?

There is no ideal amount for a cash-out refinance, other than it is enough to pay off your mortgage and leave you with something left over. Mortgage refinancing is used for many reasons, and the best deal depends on why you need to do it.

If you are refinancing to pay for something specific, you need to ensure you have enough left over in the lump sum payout to cover the expenses

Across the board, it is preferable to refinance with a better interest rate so you can reduce your payment overall, but whether or not this is possible depends on the details of your loan and your credit score.

As mentioned already, cash-out refinances are only usually available up to 80% of a property's value.

Other Things to Know

Here are a few other notable things to consider regarding cash-out refinancing.

Know the Limitations when Using a Cash-Out Refinance Calculator

These calculators cannot provide exact figures because they are not refinance lenders. Even the lenders that provide calculators on their websites are explicitly clear that actual rates may vary depending on the complete circumstances.

While they can tell you exactly how much cash you can get on a refinance based on your home equity (assuming you have the credit score and debt-to-income ratio you need), they can't give you an exact figure for your monthly payments.

You can get a pretty close estimate if you already have an agreed loan amount, term, and interest rate, but there are still hidden variables that could come into play later.

Don't Forget About Closing Costs

There will be closing costs on your refinance- usually in the realm of up to 6% of the total loan. This is because of the many similar expenses involved in refinancing as they are with financing in the first place- including the appraisal fee, credit history checks, origination fee, and any other fees charged.

If you are cashing out to pay for something specific, remember to include these expenses when you are planning your budgeting.

Think About Whether or Not a Cash-Out Refinance is a Good Idea for Your Property

Deciding to cash out funds from your home equity by refinancing can seem like an attractive concept to most, but you need to think about what it actually means and weigh up the pros and cons for your investment property.

If you have almost finished paying off your mortgage, you may not want to start all over again with another 30-year amortization schedule. The new monthly payment could be much higher, and you would go back to paying most of your monthly debt payments toward interest again.

Refinance rates are usually lower than most personal loan rates, which is why so many people consider them when they need to pay for home improvements. Again, this depends on how much cash you need to borrow and what the lenders you are in contact with decide to offer.

Refinancing with Bad Credit Scores

Does cash-out refinance require good credit every time? To be honest, the answer is yes.

A score lower than 580 is highly unlikely to be approved for cash-out refinance. Most lenders won't go lower than 620, but it depends on who you ask.

If you have poor credit but want to refinance, you may need to spend some time focusing on reducing your debt and paying bills on time to get the number up, then apply.

Look Into the Interest Rate

Although a cash-out refinance is sometimes viewed as a way to reduce monthly payments, the interest rate on the loan is sometimes higher than a regular mortgage.

The average rate and term refinance is between six and eight perfect over 30 years. Mortgage rates have been at an all-time high, so the difference at times is minimal, but it all depends on the market, the lender, and the investor.

Refinancing does, however, usually cost less in interest than it would to take out a loan. If you are cash-out refinancing to pay for something specific, it could make financial sense.

Where Does DoorLoop Come In?

Deciding whether or not to refinance a mortgage and how to calculate it is just one of the things on the list for rental property investors and owners to think about. Every day, there are a multitude of tasks and decisions to be made that impact your business and livelihood, and that is where DoorLoop can help.

As well as providing a range of real estate calculators to help you plan and manage your finances, DoorLoop offers a comprehensive and effective solution for streamlining your operation and optimizing your profitability.

Here are some of the ways it does this.

• The online payment portal lets you send automated reminders and collect rent payments effortlessly. It is easier for you and your tenants and helps you keep track of outstanding bills and total income each month.
• You can also handle your maintenance management online. Tenants have their own portal where they can submit requests, and you can respond- sharing timelines- and important dates- and managing what comes next.
• DoorLoop offers an excellent accounting package to help you monitor your finances. Track mortgage payments, insurance, maintenance bills, property taxes, and more- making it easier to work things out if you decide to apply for a cash-out refinance.
• Limit your vacancies with a customizable applications website and high-quality marketing through Zillow and Trulia. You can screen tenants easily and efficiently- and handle all lease agreements through the software.
• Use DoorLoop Calculators to work out several important numbers for your business.
• Maintain an accessible overview of your entire property portfolio at all times, at your convenience, in a far more efficient way.

This is just the beginning. The more you use DoorLoop, the more ways it can benefit your property management business. Managing your day-to-day and improving how you run your company benefits you, your tenants, and your business finances, and DoorLoop helps you take control.

Get started with a free demo to see for yourself what difference DoorLoop can make for you.

Summary

Whatever your reasons are for wanting to refinance an investment property, the cash-out option could be the way forward. You can use a cash-out refinance calculator to tell you in seconds whether you can qualify based on the numbers for your property and what you could expect to pay each month for the new loan.

A few calculations go into cash-out refinancing, and it has more than a few uses. Remember to gather all the relevant data you need beforehand- and bear in mind that the results for the predicted monthly mortgage payment are estimations only.

You should also look at quotes and compare interest rates from several cash-out lenders to find the best fit for you.

To keep on top of your finances and streamline your real estate business every day, use the DoorLoop all-in-one property management solution.