Should I Do a Cash-out Refinance of an Equity-rich Property at a Higher Interest Rate When my Current Loan has a Low Rate?

Should I Do a Cash-out Refinance of an Equity-rich Property at a Higher Interest Rate When my Current Loan has a Low Rate?

So you own a cash-flowing rental property with a sweet 3.3% interest rate and you have a ton of equity. You see there are opportunities to buy more real estate and want to pull cash out with a new mortgage loan, yet you think it’s stupid to give up a 3.3% rate for an 8.3% rate. You’re not alone with that train of thought.

So, how do you tap your property’s equity while hanging on to that awesome 3.3% interest rate? Let’s explore some options:

  1. HELOC against your investment property. A limited number of lenders may give you a line of credit against the equity in your investment property. For example, let’s say your rental house appraises for $400,000 and you only owe $200,000 against it. You have $200,000 of equity. If your bank agrees to a HELOC up to 75% Loan-to-Value (LTV), then your bank is saying they will lend the difference between the existing loan and $300,000 (which is 75% of $400,000). So, in this example, your bank would be willing to provide a line of credit for $100,000. Typically a line of credit has a fluctuating interest rate, and many HELOCs are interest-only. Imagine if your HELOC’s current interest rate is 7%. That means your $200,000 mortgage loan is at 3.3%, and your $100,000 line of credit is at 7%. That’s not bad, especially if you can find a way to earn 15% or more on the money that you borrow. HELOCs typically involve lower fees than traditional mortgage loans. One other nice thing about HELOCs – if you don’t need the full amount you only pay interest on what you actually use. One big problem for many investors is that banks typically only allow a HELOC on your primary residence. If that’s the case, let’s look at the next few options.
  2. HELOC against your primary residence. Wait, what? We were talking about tapping equity in an investment property and not from a principal residence. Well…if you have equity in your own home you could use a HELOC to fund additional investments and count that HELOC’s interest payments against your existing investment property. In other words, you could use the rent from your investment property to pay the HELOC down while counting the interest from the loan as an expense against that rental. Talk to your tax advisor about this.
  3. Term loan. This is a commercial second mortgage with a loan term and likely a balloon payment. Using the same example above, let’s say your bank is willing to lend up to 75% LTV secured by your $400,000 investment property. Since you have a $200,000 mortgage at 3.3%, your bank agrees to loan $100,000 at 8.5% with a 20-year loan term and a 7-year balloon. That means the $100,000 loan is amortized over 20 years (that’s $867.82 principal and interest each month). The remaining balance would have to be paid at the 7-year mark. Typically an investor would engage in a cash-out refinance prior to the 7-year mark so they never have to worry about the loan coming due all at once. Odds are interest rates will fluctuate down at some point in that time-frame.
  4. Private money loan. A private person looking for an investment backed by real estate and who trusts you could be a great source of financing. Private lenders usually have less stringent requirements and may move more quickly than a bank. They might even exceed the 75 to 80% LTV limits used by banks. It’s possible that a private lender charges a lower interest rate than most banks. Whereas a private lender might receive 2.5% interest in a CD or 4% interest with a U.S. Treasury bond, they might be thrilled to receive 6% on a loan to you!
  5. Hard money loan. There are hard money lenders, from individuals to nationwide institutions, who may be open to taking a second lien position in exchange for a loan to you. Hard money usually involves high fees, high interest rates, and a short repayment term (like, pay me back in 12 months or else). You could use hard money secured by your rental property to invest in a lucrative deal, and then pay off the hard money loan around 6 months later when you refinance or sell the new investment. That refinance would help pay off the hard money loan. In other words, had you not used hard money, you would not have been able to buy the new property in the first place.

The last option is not necessarily the one you want to hear – it involves a true cash-out refinance of the existing 3.3% loan. Think like a CEO for a moment. Imagine that you know you can make a 15% return on capital deployed, and your cost of borrowing it is 8%. Depending on the quality of the deal(s) you find and your ability to keep recycling the money, you’ll come out ahead in the long run by borrowing at an 8% rate and making a 15% return on it.

When evaluating whether to conduct a cash-out refinance, think of the opportunity in front of you and not just the low interest rate behind you. If you feel you need to jump at a fantastic deal and you need the cash, pulling money out of an equity-rich investment property could well be worth it even if you pay off the low-interest loan in the process. Consider the opportunity cost – what you lose if you don’t take action on the lucrative deal in front of you. And look at it another way – higher interest rates probably means more potential deals out there. A lot of wealth is created in declining economic environments, especially as those market declines lead to new bull markets.

I hope this article helps you make an informed decision. Happy investing!

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to

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