Home Equity

Home equity is the market value of a property minus the balance of every loan secured by it. A $500,000 rental with a $375,000 DSCR loan has $125,000 of equity. That equity grows through principal paydown and appreciation, and investors can borrow against it.

Tapping equity usually means a cash-out refinance. The new loan is limited both by a cash-out loan-to-value cap, often 70 to 75%, and by the lender's DSCR minimum on the larger payment. On a property with modest rent, the ratio often caps the loan first.

Equity does not appear in the DSCR formula, but it shapes the loan. More equity at purchase means a smaller loan and a higher ratio, and more equity at refinance means the lender has more cushion if the property has to be sold.

Further reading: Home Equity on Wikipedia.