Cash-Out Refinance on a Rental Property: Pros, Cons, and Alternatives

How a rental cash-out refinance works

You take out a new, larger mortgage that pays off the old one, and the difference lands in your bank account at closing. On investment properties, lenders typically cap the new loan at 70-75% of appraised value, require credit scores around 680 or better, want six months of reserves, and price the rate 0.5-1 point above owner-occupied loans. Closing costs generally run 2-5% of the loan amount.

When it is the right move

A cash-out refinance shines in specific situations.

• Your existing rate is at or above current market rates, so you lose nothing by resetting.
• You need a large lump sum and want one fixed, predictable payment.
• The property’s rent comfortably covers the new, larger payment with room for vacancies.
• You plan to hold the property long enough to spread the closing costs over many years.

The low-rate trap

The math changes completely if you locked a low rate. Refinancing a $300,000 balance from 3.5% to 7% costs roughly $875 more per month before you even count the cash you pulled out. That is the hidden price of a cash-out refinance: you pay today’s rate on the entire balance, not just the new money. For owners in this position, second-position debt or an equity sale almost always pencils better.

Alternatives that preserve your rate

A home equity loan or HELOC adds a second lien and leaves the first mortgage alone, though rental availability is limited. A home equity investment pays cash for a share of future value with no monthly payment. And on Lofty, you can sell the share of equity you choose to investors at your price: no new loan, no payment, no qualifying, and the mortgage you are proud of stays exactly where it is.