Can I use a cash out refinance to buy a second home?
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June 24, 2022

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If you’re interested in purchasing a vacation home or an investment property, a cash-out refinance might be the best way to do that.

While buying your primary residence will likely be the most significant investment you’ll ever make, buying a second home might be a close ‘second.’

Regardless of what you want the property for, you’ll need a sizable downpayment to achieve your goal. But most of us don’t have large amounts of cash with easy access. So more than likely, you’ll need to borrow it.

But before you take out a high-interest rate loan or a second mortgage, take a look at a popular and frequently more affordable option—a cash-out refinancing to buy a second home.

Let’s walk through the details of a cash-out refi so you can determine if it’s right for you.

How does cash-out refinance work?

One of the best ways to gain access to cash is to tap into the most significant investment you have, namely your home. 

The bonus is that you can access that value with a lower risk to your primary residence than you would through a second mortgage.

Simply put, cash-out refinancing replaces your existing mortgage with a larger one. Once complete, you pay off your first mortgage with your new mortgage funds and receive the difference in cash. 

Many American homeowners use this lump sum to place a downpayment on their second home, finance home renovations or make home improvements.

How much of my home’s value can I access?

You can often cash out up to 80% of your home’s equity, minus your current mortgage loan balance. 

An exception to this is a VA cash-out refinance loan (VA loans) which lets you refinance up to the total value of your home (eligibility standards are stricter, however).

Home equity calculation

For example, if your primary residence is valued at $450,000 and your current mortgage balance is $250,000, that leaves $200,000 in property value. Therefore, 80% of that home equity would be $160,000, which could be used towards a second home downpayment.

Of course, there are usually closing costs and other fees from the transaction, averaging about two to five percent of the loan amount (similar to a new home mortgage).

As with any type of loan, shopping around and comparing mortgage rates from different lenders is a good idea.

How do I qualify for a cash-out refi?

The first step for a cash-out refi is to meet your lender’s minimum borrowing qualifications.

For most lenders, this includes:

  • A minimum credit score of 620
  • A debt-to-income ratio (DTI) of 50% maximum
  • Credit history of regular, on-time payments for debts like credit cards and student loans
  • A consistent and reliable income
  • Recommended minimum of 20% home equity

You will also be required to use your funds for an eligible reason, like buying a second home, vacation home, or investment property.

Advantages of cash-out refinance to buy a second home

Using a cash-out mortgage refinance to purchase a second property has several potential advantages, including:

  • Possibly better financing for your home: Refinancing your home means you could qualify for a lower interest rate than your current mortgage terms. Cash-out refi might offer better interest rates compared to a second mortgage.
  • Better repayment options: Many lenders offer longer loan terms for repayment, 15 or 30-year fixed-rate mortgage. While a longer term might have a slightly higher interest rate, the monthly mortgage payments would be more affordable.
  • Available cash for a down payment: The most significant expense for a second home will almost certainly be the down payment. If you reach the 20% threshold, you also can avoid private mortgage insurance (PMI).
  • Available tax advantages: It’s possible to claim a tax deduction, depending on the purpose of your cash-out refinance. Some examples include completing capital improvements to your primary residence or maintenance on your rental property. Check with whoever prepares your tax returns for confirmation.

Disadvantages of a cash-out refinance to buy a second home

As with any financial product, there might be potential drawbacks to using cash-out refinancing to buy a second home. These possible disadvantages include:

  • Closing costs: Refinancing is very similar to the conventional loan of your first mortgage in that you will pay between two to five percent of your new loan balance in closing costs.
  • Collateral is your primary home: Although the risk to your home is less than if you were to get a second mortgage (because monthly payments are more affordable), your primary residence is still at risk.
  • Longer term: Many borrowers choose a longer term for refinancing, as it lowers the monthly payments significantly. However, it will be quite a while before you fully own your second property, perhaps as long as thirty years. You will also be paying interest during that period, which will add up over the decades.

Can I use cash-out refinance to buy an investment property?

Using a cash-out refi to purchase a rental property is quite common. 

Leveraging your primary residence to purchase a long-term investment property can be a great way to start your real estate investments.

Rental income can provide you with a significant return on investment (ROI). This detail may also make your proposal more attractive to a lender since your rental income could be used towards eligibility.

Rental properties are considered riskier than primary residences or vacation homes, so you will likely pay a higher interest rate. 

Whether or not the home is immediately rentable (turnkey) or needs home renovations will also be a factor. Your down payment might also need to be as much as 25%.

Once it’s paid off, that rental home could also become the vacation home you always wanted.

How long does a cash-out refinance take?

Expect cash-out refinancing to take between 45 to 60 days—but there are ways it could be faster. For example, quickly providing documentation and securing the appraisal can speed up the underwriting process.

Cash-out refinance with AAA Banking

A conventional refinance can be a secure and affordable way to get a cash-out refi for your vacation home, second home, or investment property.

Whether you’re searching for a way to invest in real estate for profit or want the luxury of a second home, using your home’s equity can be the best way to achieve your goals. 

Contact AAA Bank to find out the next steps to get that second home away from home.

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