7 Smart Steps to Use a Cash-Out Refinance to Buy an Investment Property
Why Use a Cash-Out Refinance for Real Estate Investing?
Tapping into your home’s equity is one of the fastest ways to fund a down payment for a rental property. According to ICE Mortgage Technology, U.S. homeowners have more than $200,000 in tappable equity on average. A cash-out refinance allows you to access a portion of that value, then use it to expand your investment portfolio.
This strategy can work — but only if the numbers make sense. Let’s walk through the full process and key considerations before moving forward.
Step 1: Make Sure You Have Enough Equity
Most lenders allow you to borrow up to 80% of your home’s current appraised value in a cash-out refinance. However, to get the best rates and terms, it’s smarter to keep your new loan at or below 75% of your home’s value.
Here’s an example:
If your primary home is worth $500,000, and your current mortgage balance is $250,000, you could refinance into a new loan of $375,000 (which is 75% of the home’s value). After paying off the old loan and deducting around $7,000 in closing costs, you'd be left with approximately $118,000 in cash.
This $118,000 could then be used as a 25% down payment on a rental property priced around $472,000.
Keep in mind, you can technically go up to 80% loan-to-value on both your current home and the investment property, but doing so usually results in higher rates and stricter qualification guidelines.
Step 2: Understand the Cost of the Cash-Out Loan
Replacing your current mortgage with a new, larger loan at a higher interest rate could increase your monthly payment dramatically.
Let’s say your current mortgage is $250,000 at 4%, with a monthly principal and interest payment of about $1,194. If you refinance to a $332,000 loan at 7% (to take out $75,000 in cash plus closing costs), your monthly payment would jump to approximately $2,209 — an increase of more than $1,000 per month.
Before refinancing, you’ll need to be confident that the investment property will generate enough profit to justify this new expense.
Step 3: Evaluate Rental Property Cash Flow and ROI
Be realistic when evaluating rental income. Many new investors calculate their profit simply by subtracting the mortgage from the rent — but that leaves out key expenses.
You must include costs like taxes, insurance, maintenance, vacancy losses, capital improvements, and possibly property management fees. These factors can significantly reduce your monthly profit.
For example, if you buy a $300,000 rental property with a 25% down payment, your loan amount would be $225,000. At a 7.5% interest rate, the monthly principal and interest payment would be about $1,573. Add in $300 for taxes and insurance, and another $500 for vacancy and repairs. Your total monthly expense would be roughly $2,373.
If the property rents for $2,500 per month, your actual monthly profit would only be about $127.
That’s a slim margin — especially when your own housing costs just increased by over $1,000 from the refinance. Every situation is different, so run your own calculations carefully. It might work better if:
Your current mortgage rate stays the same or goes down
You’re planning to flip the property, not rent it long-term
The rental property is significantly under market value
You’re using it as a short-term rental with higher monthly income
Step 4: Compare Cash-Out vs. HELOC or Home Equity Loan
If you currently have a low mortgage rate (say, 3–4%), it might make more sense to leave your first mortgage intact and add a second mortgage — like a home equity line of credit (HELOC) or home equity loan.
These options let you borrow against your equity without replacing your entire loan — and they usually come with lower closing costs.
Here’s how this breaks down:
If you took a full cash-out refinance for $332,000 at 7%, your new monthly payment would be around $2,209.
If you kept your current $250,000 loan at 4% (with a $1,194 payment), and added a $75,000 HELOC at 8% interest-only, your combined monthly cost would be around $1,694. If you opted for a home equity loan instead of a HELOC, your total monthly cost would be approximately $1,821 (based on a 20-year loan).
In both scenarios, the second mortgage route could save you $400–$500 per month over a full cash-out refinance. Unless mortgage rates drop substantially, keeping your current loan and adding a second mortgage may be the smarter move.
Step 5: Apply for the Cash-Out Refinance
If the cash-out strategy makes sense financially, the next step is to apply for the refinance. This process is similar to any other mortgage application:
Shop multiple lenders for rates and fees
Submit your application
Provide income documentation, tax returns, bank statements, and proof of assets
Get a home appraisal
Finalize loan terms and close
At closing, your current mortgage is paid off, and the remaining cash is wired to you (minus closing costs). Some lenders may ask for a letter explaining how you plan to use the funds. Simply say you’ll use the money for “future investment opportunities.” You are not required to specify a property or provide future loan terms unless they ask.
Step 6: Get Preapproved for the Investment Property Loan
Now that you have your funds, it’s time to apply for a mortgage on the investment property.
This process is similar to buying a home for yourself, but with a few added layers.
For one, you’ll need reserves — extra funds in your account after closing — especially if you already own other financed properties. Here’s what most lenders require:
If you own 1–4 financed properties: 2% of the total unpaid loan balances as reserves
For 5–6 properties: 4% of the unpaid loan balances
For 7–10 properties: 6% of the unpaid loan balances
Note: Your current home and the property you're buying do not count toward these limits.
Using Future Rent to Qualify
Fannie Mae allows borrowers to use expected rent from the new property to help qualify. Your appraiser will fill out a Fannie Mae 1007 rent schedule, or the lender may ask for a signed lease agreement if the home is already rented.
Step 7: Purchase the Property and Launch Your Investment
Now that you’re preapproved, go out and find the right property. Once you close, it’s time to:
List the home for rent or furnish it for short-term stays
Set up property management, if needed
Start collecting rental income
With careful management, this property can create income and equity growth for years to come.
FAQs: Cash-Out Refinancing for Investment Property
Can I deduct the interest on a cash-out refinance used to buy an investment property?
Yes, if the funds are used to purchase or improve a rental property, the interest is generally tax deductible. Be sure to document the use of funds.
Is a HELOC better than a cash-out refinance?
If your existing mortgage rate is significantly lower than current rates, a HELOC or home equity loan might be the better choice. It allows you to keep your original loan and avoid a large rate increase.
What credit score do I need to qualify?
Most lenders require a minimum credit score of 620, but for investment property loans, a score of 680 or higher is usually needed to qualify for better terms.
Can I use a VA or FHA loan to buy a rental?
No. VA and FHA loans are for owner-occupied properties only. You must use conventional financing or other investor-friendly loan types for rental properties.
Final Thoughts: Is a Cash-Out Refi a Smart Move?
Using a cash-out refinance to buy an investment property can be a powerful strategy, but it’s not without risk. You’re leveraging your primary home to finance a second property. If rental income dries up, you're still on the hook.
✅ It’s a good idea if:
Your rental property will produce steady positive cash flow
You understand property management and real estate investing
You’re comfortable with some risk and long-term commitment
❌ It’s not ideal if:
You’re chasing quick returns without doing the math
Your monthly housing costs will be too high
You’re unsure about the rental market
Always run the numbers, compare loan options, and talk to a knowledgeable lender or financial advisor before making your move.
