Refinancing: What is Actually Required and How Does it Work?

[Thomas O'Donnell]

Whenever we hear about investing in real estate, the topic of refinancing at a later date always comes up. Now this can be for a BRRRR, if rates fall and you're trying to obtain a lower rate, or for some other reasons. But no one ever talks about how refinancing actually works and what is required in order to refinance your mortgage. Now let's say someone bought with a high rate (7-8%) during 2022, and they are looking to refinance into a lower rate come 2023 or 2024 when rates drop (I believe they will, but who am I?). How would one go about this? What is required in order to refinance your property, and what are the steps that actually occur? Are there costs that people should be aware of? Any limitations or cases where you either cannot refinance or it wouldn't make any sense to? I feel like no one ever really digs deep into these questions to explain how it all comes together. Asking for all of those who are wondering the same thing.

[Kenneth Garrett]

@Thomas O'Donnell

Refinancing is acquiring a new mortgage and the idea is at a lower rate. A $200,000, 30 year mortgage at 7% is a monthly payment of $1331, but at 5.5% it’s only $1136, that’s a $195 savings each month or $2,340 a year.  Yes, there is a cost to refinance, depends on the lender.  1% and some closing cost as an example.  The first year of savings might be washed away by cost, but after that you are saving money whereby your profit becomes larger with cash flow from rent.  While you are waiting to refinance in a year or two you are reducing your principle so when you do refinance it might be at $195,000 or $190,000 which will reduce your cost and Increase cashflow.  You definitely want to wait till the reduction in interest rate and terms are worth the refinance as there is a cost.

Years ago you might have gotten an interest rate at 8%.  You might have refinanced multiple times, by the time it came down to 3%.