Using Cash-out Refinance to Purchase a Second Home

Most people usually start looking for a second place to become an investment property or vacation home. Using equity from your current home can be a bit easier since it'll help you make a down payment for your second property. It'll also assist you in lowering your current mortgage interest.

Process of using cash-out refi to purchase a second home

Using cash-out refinancing will make it easier for you to access your home's equity through the replacement of your initial mortgage loan with a bigger mortgage loan. In this case, your existing loan will be paid in full and then get the cash difference. This cash difference (lump sum) can be used as a down payment for your second property. It's essential to note that there will be some deductions from this loan. Typically, you'll pay 2%-5% of the mortgage loan amount. Therefore, comparing lenders can help you save money on these deductions since lenders charge different rates.

Conditions for qualifying

To qualify for a cash-out refinancing loan to purchase a second home, you must meet the following conditions:

- Credit score of at least 620

- You must have an excellent history of making timely payments

- Debt income ratio of 50%

- More than 20% home equity

- You must have a consistent source of income

Benefits of using cash-out refinancing to buy a second home

1. Payment flexibility

Most mortgage lenders offer flexible repayment terms. Typically, you'll get 15-30 years to repay the loan. This means that the repayment amounts will be spread over a more extended period which means that monthly payments will be much smaller and affordable.

2. Low interest rates

Using a cash-out refinance will help you get a much better rate compared to your existing mortgage. There are high chances that you'll get lower interest rates which will lower your entire debt.

3. You'll get the initial down payment

The cash difference between your existing mortgage and the new one will help you get a lump sum that you'll pay as a down payment.

4. Tax benefits

It's possible to claim tax deductions, especially during property maintenance.

These are the top benefits of using cash-out refinancing to purchase a second home. The only downsides of this are that you'll incur high closing costs, and your home will become collateral, thus risking foreclosure if you’re not in a position to pay off the debt.