What is Refinancing?

[Kyle Kline]

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]

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!