Basic Questions About Refinancing... What is it?

Question

Okay, this is a basic concept that I'm having trouble with. I was listening to a Podcast where Brandon had mentioned a 4 plex he bought for his daughter's college tuition. Below is the example...

-Buy the 4-plex for $200,000 amortized for 15 years

-After the 15 years it's worth $250,000

-If you sell it you will be taxed so instead refinance

-Refinance it at 80% and you would get your $200,000 back as well as still having an income producing 4-plex

This is where I have some questions.

1.If you refinance does the bank cut you a check for $200,000 and you can spend it on whatever you want?

2.When I was searching Google for answers I also found people who buy a property for cash and then refinance to get the cash out of it. I don't understand how this works... Can someone explain this process in really basic terms. Maybe with some number examples? If you bought a property for $100,000 cash and then refinanced the bank is basically buying it from you (rather giving you a loan for that amount)?

I'll probably have some more questions from these answers but I appreciate the help with such basic concepts.

Patrick Liska · Answer

Tyson,

lets use the 200K example, 15 year loan, after 15 years it is paid off and through Appreciation it MAY be worth 250K. when you Refinance ( which technically is a first mortgage again) most banks will lend at 80% Loan To Value, so 80% of 250K is 200K. so that original purchase price is given back to you in the form of a loan, not the bank just handing you 200K, You will have to pay that back over another 15 years or so, but you can take that 200K and invest it in more properties and not have to pay tax on it if you were to sell the property. the next property or properties will earn you income and tax deductions and you just keep doing the same to build up your portfolio of properties.

Patrick Liska · Answer

@Ian Kurela, if you can purchase the 2nd home for the 200K then yes, you will only have the one mortgage. But why not buy (5) 200k homes with that money ? 20% down is 40K, think of the income and possible appreciation from now owning 6 properties.

@Tyson Lee you can certainly change the terms, this is a whole new loan and if you can afford to do a 10 year loan, why not.  you can pay cash for the house and when you go to the bank they may call it a refinance, but it's really just a mortgage loan at that point, you are not taking a previous loan and converting it to a different interest rate or years.  as far as your next question,you could look at it that way because you would be getting your initial 200K back and have only the 10K left in the property therefore your Cash On Cash return will be real good.

Joe White · Answer

And as what these guys are saying -  yes, you now have to pay that loan back; but you likely have tenants in that fourplex that are doing that for you. The tenants are paying the debt, covering your vacancy rate, your repairs, ect and there is probably extra cash flow for you to enjoy.

Patrick Liska · Answer

@Ian Kurela you can refinance at any time, as@Brian Beadle mentioned, as long as you have equity in the home, but there needs to be at least 20% of the equity remaining in the property. so if you have a 200K home, you have 100K loan still on the house you would only be able to borrow 60K ( 200K *80%=160K.....160K-100K =60K ).

@Tyson Lee what Brandon was talking about was taking that 200K in equity and paying for the College, you do not have to buy another house with it, just keep in mind it is still a loan that has to be paid off, but you probably have a better interest rate then a student or personal loan. If you were to use it to only pay for college i would probably do as @Mark Whitted mentioned and get a Home Equity Line of credit, this way you only pay back the loan on the amount that you borrow, especially if it is going to be spread over 4 or so years.

Tyson Lee · Answer

Thanks @Patrick Liska that's very helpful.

Maybe you can clear up what Brandon was talking about in his podcast. He said after owning the 4-plex for the 15 years it would maybe appreciate to the $250,000 (after initially buying it for $200,000). After the 15 years it would be paid off and he would refinance it and his daughter can use the $200,000 for college and he would keep the property. Where does the $200,000 for college come from? Since that is just a loan? It may be hard for you to explain since you're not the one that said it but maybe you know what he's talking about.

Ian Kurela · Answer

@Patrick Liska

Now I understand the hype around the BRRRR strategy. Can you only refi after the first mortgage is paid off? How does the strategy change? Thank you for all your input so far, very helpful.

Tyson Lee · Answer

Thank you for the clarification @Patrick Liska. Can you negotiate the terms of the refinance? So if your original loan was for 15 years at 4% interest maybe the refinance is 10 years at 5% interest or does it stay the same as the original loan?

Also, keeping with the same numbers but a different example. Let's say you bought a $200,000 property for cash. You do $10,000 in renovations and now it is worth $250,000. Can you now go to a bank and ask for a mortgage on the property? If so, what is this called (still refinancing)? And will they possibly do a Loan To Value of 80% still? So now you have this property that you only put $10,000 down on?

Thank you for the help in clarifying some pretty basic stuff.

Tyson Lee · Answer

Okay this is all making sense now. Thank you for all the clarification from everyone.

Basic Questions About Refinancing... What is it?

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