The real estate market is defined by rising home prices and strong buyer demand. That’s been the trend for some time.
During this period of growth, homeowners have also gained home equity at record pace. Equity is simply the difference between the balance on the mortgage and the current value of the home.
Depending on how much equity a homeowner has accumulated, it’s possible to borrow a large amount of money through a cash-out refinance. A cash-refinance can also save you on interest cost, as rates remain relatively low, despite recent rate hikes.
The interest rate on a refinance is more favorable than traditional loans. That’s why this method is one of the most efficient ways to borrow a large sum of money.
The funding from a cash-out loan program can go toward purchasing a second home.
Applying for a cash-out refinance is a straight-forward process. Much like applying for a mortgage, the lender will evaluate the applicant’s credit, debt and equity and verify income and other financial details. As far as lending requirements, they are similar to those you’ve already satisfied as a homeowner.
Depending on how much you pulled from the cash-out refinance for a down payment, you can secure a competitive interest rate for the second home. Homeowners can access affordable financing for a down payment, putting their equity to work for them.
Buy second home
Unlike an investment home, a second home is a secondary residence for personal use. Homeowners must spend at least a few days a year at the home to be considered a part-time resident. As a second home, it cannot be rented out.
Lenders ask that the home be at least 50 miles away from the primary residence. If not, it’s possible that the bank will designate it as an investment home. Borrowing standards for investment homes are more stringent.
If you satisfy the requirements for a second home, you’re in for a smooth and flexible homebuying process. Borrowers will need to invest about 20% for a down payment. Given how much equity homeowners have earned, 20% should be an attainable amount for a cash-out refinance program.
Buy vacation home
Similar to buying a second home, a vacation home is for personal use but not to live in year-round.
In most cases, the property is located far away from your primary residence. As a vacation home, borrowers will encounter firmer requirements, such as a large down payment. Vacation homes can be offered for rent when not in use as a vacation property.
Buy an investment home
Buying a second home for an investment allows homeowners to leverage their home equity to finance something with an overall value that far exceeds the investment.
Loan approval for investment homes will be subject to the projected risk. Future land value, condition of the property and your plans for either selling or renting it out are some major considerations the lender will review.
If the property needs some work, the lender will ask for a larger down payment.
Buy rental property
For investors who prefer to step immediately into the role of landlord and rent out the property, this is another option.
Banks rank the risk of a rental property below investment transactions. Some rental property investors can expect to pay about 25% for a down payment. And, you might be able to use future rental income to qualify for the loan.