How a cash-out refinance works
A cash-out refinance replaces your current mortgage with a larger one and pays you the difference in cash. Lenders cap the new loan at a percentage of the property value, called the loan-to-value ratio (LTV).
Cash out = value × max LTV − current balance − closing costs
The cash is not free: you usually take on a new 30-year loan, often at a higher rate than the one you replace, so the payment rises and the total interest paid over the life of the loan grows.
Using it on a rental
Investors use cash-out refinances to fund the next purchase, as in the BRRRR method. Enter the property’s monthly net operating income to see cash flow before and after, and the lender DSCR on the new payment. Many DSCR lenders want at least 1.20–1.25×.
Is it worth it?
Compare the yearly increase in payments with what the cash will earn. If the extra payments equal 9% of the cash you take out, the new investment has to earn more than 9% a year just to break even. The calculator shows that figure as “yearly cost of the cash”.