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

Question

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 · Answer

@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%.

Carolyn Yates · Answer

Closing costs for the new mortgage or refinance vary by state too.  You can expect to pay anywhere from 0.5% to 3.8% of the amount financed.

Ron H. · Answer

Always get quotes from several recommended credit unions and brokers.  Compare total cost, not just interest rates snd points.  For refinancing I typically use a zero closing  cost lenders to preserve cash  These are not actually zero cost loans since costs are paid for with a higher interest rate.  Rates earlier were about 0.5% more than typical loans.

get all your docs in order before calling.  They typically want 2 pay stubs, 2 tax returns, insurance declaration pages, copies of lease, etc.

Scott E. · Answer

Steps to doing a refinance:

1. Call a big bank, credit union, or broker and talk to a mortgage loan officer. The MLO will have you fill out an application over the phone, they will pull your credit, and present your loan options.

2. If you like one of their offers, the mortgage loan officer will request income documents, and then pass you on to the mortgage processing team

3. Your processor will collect your income documents, order a title report, and order an appraisal on your home

4. Once your file is complete (all documents received), your processor will hand the file off to an underwriter.

5. The underwriter will approve or decline your loan

6. If approved your file will be passed to the closing team. The closer will call you to schedule a closing. This is where you will meet with a notary and sign all of your final refinance paperwork.

7. Your loan will fund ~3 days after you sign all of your documents. The title company will handle all of the paperwork and movement of money

8. Your new mortgage payment is due ~60 days after closing. You usually get to skip a payment when refinancing.

Charles Carillo · Answer

@Thomas O'Donnell

Refinancing FHA mortgages is pretty straightforward. There are a number of brokers out there you can speak to (or direct lenders) and they will send you a list of the required documents and they will explain the refinancing process. Refinancing a commercial mortgage though is a little more in-depth. They will most likely require an appraisal and you might need to pay a prepayment penalty if your current mortgage has one.

At this point, I would focus on repositioning the property, renting to good tenants, and making sure to always pay the mortgage on time. When the time comes to refinance, you will be in a good position to find the best rate and terms.

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

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