New Investor: What is Refinancing and how does it work?

[Jacob Cramer]

I'm a newbie to real estate and investing, can someone please explain to me what refinancing is and how it works?

[Chris Armstrong]

@Jacob Cramer 

Couple of flavors when it comes to refinancing. (I may be missing a some so others please correct me if I am wrong/missing) This is 1000 ft view explanation.

1) No cash out Refinance- Changing the terms of your mortgage loan without drawing out any additional equity from home. For example lets say you buy a house for $100K on a 30 yr mortgage @ 3.50% interest rate. You Could refinance that loan into a 15 year mortgage, or if interest rates become more favorable, you could change that aspect of the loan from a 3.5 to say a 3.0. This process does cost money, so reasons for doing it should make sense.  

2) Cash out Refinance- This is the one that is becoming more and more well known thanks to the BRRRR methodology that was hashed out here. Basically you buy a home with cash (or some other means) and there is no debt or not much debt on the home. You then find a lender who will allow you to put a note (mortgage) on the property under a set of terms similar to the ones above in the no cash out example (i.e. 30 yrs @ 3.5% 100K). You can then pull you money back out of the home leaving a portion of equity (typically 25%-35% depending on lender) and you can redeploy your cash.

Debt to income ratio will come into play here unless you have established a rental track record for your home you wish to refinance. I am sure someone will come behind me and spell it out better. 

I just did my first BRRRR yesterday, put in $105K got out $103K and I have a home with $48K in equity in it on a 30 year note @ 5%. Pretty cool deal if I say so myself.