A cash-out refinance replaces your current mortgage with a new, larger one and pays you the difference in cash. It lets you turn equity in a property into money you can use without selling the property.
Maximum cash out = (appraised value × maximum loan-to-value) minus current loan balance minus closing costs
Say your rental appraises at $400,000 and you owe $220,000 on it. A lender that allows 75% loan-to-value will lend up to $300,000. That pays off the $220,000 balance and $8,000 of closing costs, and leaves you $72,000 in cash. You still have $100,000 of equity in the property.
The limit varies by lender, loan type and property type. Lenders commonly allow a lower loan-to-value on investment properties than on a home you live in, and many require a seasoning period before they will lend against a new, higher value.
The cash is borrowed money, and you pay interest on it. Your new payment is based on $300,000 instead of $220,000, and the rate may be higher than on the loan you are replacing. A common mistake is looking only at the cash you receive. Before you refinance, check that the rent still covers the bigger payment with room to spare, because pulling cash out can turn a profitable rental into one that loses money each month.