What is Refinancing?

Question

I am new to real estate and have a question that I am somewhat embarrassed to ask. In my reading on various investing techniques, specifically the BRRRR method, I continue to come across the idea of refinancing. Specific to BRRRR, Brandon Turner mentions that "by refinancing, you have the possibility of getting all your money back." I guess I must not fully understand what refinancing means, because my only understanding of why one would refinance is to get a better interest rate on their loan. Can someone please help me understand what it means to refinance and how this could lead to getting your money back? I have tried to Google this but have a hard time wording my question in a way that yields any meaningful results.

Thanks in advance to anyone who is willing to help!

Rachel Kokosenski · Answer

Kevin - this is the place to ask questions you may be too embarrassed to ask elsewhere! Typically, you would refinance a property for a couple of reasons:

1. To get a better interest rate or better terms (like changing from a 30-year loan to a 20-year loan, for example).

2. To be able to access your equity in the house and "cash out" when you do the refinance. Essentially, if you bought a house for $200k, did some improvements to it so that it was worth $300k, you could then refinance it and pull out up to 70-80% of the Loan-to-Value amount. That means you look at being able to pull out most of the difference between your loan amount and the new appraised amount of the home.

Typically, in a BRRRR situation, refinancing to pull cash out allows you to then take that cash and put it down on a new purchase so you can increase your portfolio. Keep in mind that when you refinance a loan you do start the clock over on the loan, meaning you get a new 30-year term for example. However, if the numbers make sense and you can afford the new payment it can be a great way to finance future purchases.

Hope that made sense for you. If not, please ask more questions!

Rachel Kokosenski · Answer

@Kyle Kline - my pleasure! This is a great community to learn in!

Rachel Kokosenski · Answer

@Kyle Kline - well, you have to wait long enough to have built up enough equity to borrow from the value of the house. If you don’t have enough equity in there, you won’t be able to do it. Example - I bought a house for $62k, with a loan for $50k. Several years later, I refinanced the loan to be a $90k loan and took out about $30k which I put down on another property purchase. Now, I still own the house and it is worth $175k. I could actually refi it and take money out again if I choose as the loan balance is about $88k now. You can generally refinance about every 6 mos.

Does that help?

Kyle Kline · Answer

Do you have to have paid the amount on the mortgage that you want to cash out on the refinance? In other words, how long do I have to wait in order to refinance and pull out that cash? I hope this question makes sense, I’m having a hard time wording exactly what I’m trying to ask.

Kyle Kline · Answer

Thank you all for your responses and help! These responses have all helped me get a better understanding of refinancing. I appreciate you all taking the time to help a newbie understand the basics.

Nicholas L. · Answer

@Kyle Kline

if you buy with cash, it's a cash out re-finance - you now have one loan

if you refinance, you're using a new loan to pay off an old loan - the old loan is extinguished - you now have one loan

scenario 2 is much harder to do

Eliott Elias · Answer

You are referring to a cash out refinance, this allows the borrower to pull out up to 75% of the properties LTV. If you are all in at less than the LTV then you will receive all the money you invested back.

Steven Goldman · Answer

Welcome think of it this way. You buy a property for 100k. The rehab. is 50k. You now have 150k together with lending costs, closing costs and carrying charges in the property. Say 180k. The after repair value is 230k. you can now borrow in the range of 75 percent of the new value of the property. That is $172,500.00. That means you leave behind $7,500.00 together with the new lending costs behind in the property, and get all of your initial investment back out of the property to do another deal. Buy, rehab, rent, refinance, repeat. Good luck and keep moving forward!

What is Refinancing?

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