Cash-Out Refinance

A cash-out refinance pays off an existing loan with a larger new one and hands the borrower the extra as cash. DSCR lenders offer cash-out loans on rentals, usually with a lower LTV cap than a purchase and the same test that the rent must cover the new, higher payment.

Two limits set the loan amount. The loan-to-value ratio cap, typically 70 to 75% on cash-out, gives $350,000 to $375,000 on a $500,000 appraisal. The DSCR minimum gives a second number from the rent. At 7.5% over 30 years, $4,000 of rent with $708 of monthly taxes and insurance supports about $356,000 at a 1.25 minimum. The lower figure wins.

That is why cash-out deals often stop short of the LTV cap. The appraisal may allow more, but the rent cannot carry the payment. The fixes are a higher rent, lower insurance or a lender whose minimum is closer to 1.0.

Further reading: Cash-Out Refinance on Wikipedia.