Re-Financing Out of a Private Mortgage

[Seth Domoto]

I have a private loan from a family member for a REO property I purchased 6 years ago as an owner-occupant. The loan is for $120k with 3% interest only payments each month. The loan terms call for me to re-pay the $120k principal if/when I decide to sell the property. I purchased for $140k and I am confident given the improvements I made and the current market, it would appraise for $200-$225k.

The property is now a rental and is producing significant monthly cash flow (approx. 35-38%).  Given the additional equity build-up, would it make sense to go to a bank and "re-finance" by getting a traditional mortgage, freeing up additional capital (due to the increase in equity) for me to utilize on other deals?  Is this even possible?

One thing to keep in mind is since it is now an investment property I'm guessing the bank rate would be somewhere in the 4-4.5% range.