A cash-out refinance can provide a crucial supply of funds based on a commercial mortgage you’re currently paying off. It’s usually an option for borrowers with an existing mortgage who need to finance a business project urgently. It can pay off if used in income-generating activities, but it doesn’t always work for everyone.
Here’s a look at what cash-out refinance is and when using it for investment purposes is a good idea.
Understanding Cash-out Refinance
As an investor, you can take a new and bigger loan to replace an existing mortgage by taking advantage of your property’s equity growth. This is known as a cash-out refinance, an ideal strategy for obtaining liquid cash for business uses, such as upgrading or renovating your existing commercial spaces. It’s important that you understand the benefits and setbacks of this financing option before taking it.
When to Use Cash-out Refinance
Cash-out refinances may be useful to you in scenarios such as:
- You need quick cash: Cashing out can provide instant cash for business investment. You can use the funds to improve or expand your commercial properties to attract higher rental fees or extra rental income. It’s generally a good option if used to spur business and revenue growth, making it a lot easy to pay off your new commercial real estate loan.
- For low-interest rates: You can use cash-out refinance if it offers attractive financial perks, including softer repayment terms. For example, the loan may have a 30-year amortizing period with appreciably lower interest rates. When the rates are low enough, it’s possible to have lower monthly payments. These terms could allow you to inject more of your business income into revenue-generating projects.
- To take advantage of tax benefits: There are ways to use the funds from a cash-out refinance and reduce your taxes at the end of the year. You could use the liquid cash to make physical upgrades on your commercial property, for example. This usage of loan funds may allow you to deduct the mortgage interest from your annual taxes legally. Remember to evaluate the value of any tax break and ensure it’s substantial enough to justify a cash-out refinance.
Caution Before Cashing Out
Keep the following potential setbacks in mind when evaluating whether or not to get a cash-out to refinance loan:
- You’re extending your loan period: Are you willing to restart the payment clock for a 30-year mortgage? You may pay lower interest rates and monthly payments as a result, but you’ll do this for much longer. The cumulative interest costs will certainly be higher over decades of monthly loan repayments. If you wish to pay off your mortgage within the shortest time possible, you may want to avoid cashing out.
- There are higher risks involved: When you refinance your loan by extending the repayment period, you’re assuming additional risks. For instance, the transaction comes with extra closing costs. You’ll want to weigh these costs against any attractive benefits before obtaining a cash-out refinance mortgage. Will the investments you’re making with the instant cash justify the costs of the new loan? Consult a commercial mortgage advisor for professional guidance about any financial risks you may be taking.
As a small business owner, it’s important that you understand the pros and cons of cash-out refinancing before using it to secure funding for business investments. Would you like to discuss your commercial real estate financing requirements? At Fidelity Mortgage Lenders, we’re happy to help you navigate the commercial lending market in California. Contact or call us at (800) 752-9533 to speak with a knowledgeable advisor!