Investing in short-term, vacation, and long-term rentals can be a relatively easy way to generate income and accumulate wealth. At The Mortgage Shop, we deeply understand this. We’ve helped thousands of investors jump-start their investment property cash flow and access that much-needed equity. Through our flexible, low-barrier loan products, we make financing simple.
One option our investors choose is a DSCR cash out refinance. In this article, we’ll cover the basics and benefits of a DSCR refinance for investors just like you. Are you the right investor for a DSCR refinancing mortgage?
Let’s find out below.
Understanding the Basics of DSCR Mortgages
What is DSCR in Real Estate? To put it simply, debt service coverage ratio (DSCR) mortgages are loans disbursed based on a property’s capacity for generating ample cash flow to ‘cover’ its debts, such as property taxes, insurance, and monthly payments.
Unlike traditional loans, DSCR loans are used to purchase investment properties. A DSCR lender is not typically concerned with the borrower’s creditworthiness, income, and personal financial information. This makes DSCR loans ideal for purchasing short-term and long-term rentals.
Lenders usually want to see a DSCR between 1 and 1.5 to indicate that the borrower can consistently make mortgage payments.
What is DSCR Cash Out Refinancing? Everything You NEED to Know
DSCR cash out refinancing is a type of refinancing that provides investors access to the equity in their properties. Using extracted equity, an investor replaces the existing mortgage with a new, larger mortgage. The surplus funds from the replacement mortgage can then be utilized for various reasons, such as renovating properties, paying outstanding debts, or reinvesting in alternative assets.
This debt service coverage ratio (DSCR) is important in refinancing because it determines the maximum loan amount permitted. Most lenders require a DSCR of at least 1 for commercial properties. In other words, the investment property’s net operating income (NOI) must be at least the same as annual payments on debt, including payments on the new mortgage.
For example, if an investment property generates an annual NOI of $200,000 with annual debt payments of $150,000, the DSCR would be 1.33 ($200,000 / $150,000).
5 Key Benefits of a DSCR Cash Out Loan
You should always consider DSCR Loan Pros and Cons before attempting to refinance. Although there are certain disadvantages to DSCR refinancing, investors also enjoy numerous benefits. The advantages of using DSCR cash out refinance include:
- Cash Extraction: Short-term and long-term investors can access their investment property equity without having to sell or transfer the property, making it easy to access much-needed capital.
- Flexibility: Any surplus funds stemming from the new DSCR refinance mortgage can be utilized to cover other debts, improve properties, or start new ventures.
- Reduced Interest Rates: Oftentimes, investors may enjoy lower interest rates than when they assumed the initial mortgage. A new cash-out mortgage can capitalize on this rate discrepancy.
- Increased Cash Flow: When surplus funds from the cash-out are used toward capital improvements, the value of the investment may increase, thereby increasing cash flow as well.
- Debt Consolidation: Investors may also utilize surplus funds to address high-interest debts. This, in turn, may reduce overall debt and create opportunities for better income streams.
Does a DSCR Cash-Out Make Sense For You?
A DSCR (Debt Service Coverage Ratio) cash-out refinance can be right for any investor looking to access equity quickly while reducing mortgage interest rates and paying off debts. That said, investors ‘cashing out’ will face new terms, closing costs, and potentially even new risks. As always, consult with investment experts first.
Consider the following:
Debt Service Coverage Ratio – Again, DSCR measures the ratio of a property’s net operating income to its debt. This means that a property with a DSCR under 1 is not generating sufficient income to cover its debt service. When this is the case, you could reconsider performing a cash-out refinance. A new loan could worsen your debt and increase the monthly payment amount. Not to mention, it may be difficult to obtain a new loan anyway.
Terms: Refinancing gives you the ability to modify the terms of the loan. Your new loan duration may be longer or have a different interest rate. Be sure to consult a mortgage broker or loan specialist to fully understand how new terms impact payments, debts, and cash flow.
Creditworthiness: With a DSCR cash out loan, you can extract up to 75% loan-to-value (LTV), with a down payment as small as 15% on a purchase. However, first, you have to qualify. Make sure your credit score and history are solid or contact an expert about ways to improve your FICO score. A typical acceptable range is minimum 680.
Equity: DSCR cash-out refinancing can help you access equity when you need it most. If you don’t have much equity built up in the property, a cash-out may be a waste of time and effort. Should you choose to cash out, ensure you have a plan to spend the capital wisely.
Interest: Are you suffering from suffocating interest rates? Good news. Many times, investors cash out and then refinance with different interest rates. This may help you secure lower rates and potentially lower your monthly mortgage amount. It all depends on current market factors.
Considering ‘Cashing Out’?
A DSCR refinance may be right for you if you have substantial equity in your investment and want to use it to address debts and new ventures.
Are you looking to reduce your monthly mortgage payments or lock in a lower interest rate? Consult leading mortgage experts about your financial situation and circumstance. Depending on your goals and objectives, refinancing may be right for you.
Make investing in properties super easy. If you’re considering a DSCR cash out refinance, contact The Mortgage Shop experts for premier loan options today.
