Anyone have a good link to the basics of the refinancing process?

13 Replies

Can someone point me in the right direction for understanding how a refinance of a home/duplex works? I get that you have equity and that’s valuable, but I just can’t seem to get my head around the numbers side of it - An example would be best, so if there’s a thread with this already I’d love to see it but I can’t search on the app! Thanks!

@Michael Bentz   Did you try to google "what is refinance?"

Basically you are replacing current lone with another. often it is done when you can achieve better terms on the new loan OR if the property gone up in value you can refinance the property and pull some of the equity out. 

Example:  you purchase the property for $400k with 80% loan to the value/ purchase price. so the loan is $320k and the 80k is the down payment you had to put as the remaining 20%.

After 2 years the  house is gone up in value to $500k, now you can go to different bank and ask them to give you 80% of the new value of $500k. 

80% of 500k is $400k. so the new Bank say yes to refinancing the existing loan to new loan of $400k.  

Note: now that the new bank provides you with new loan of $400k you will repay the original loan of $320k to the first bank and keep the $80k different.

Effectively you now get all your money back and have no money tide up in this property.

Note: you don't have to go to different bank, I just used this example as it is easier to understand when it is separated.

I hope that helps!

The refinance process is just like a new loan.

Go to the lender and fill out the application, provide documentation they require and they will give you a sheet with the estimated fees for funding and closing. The bank will order an appraisal which you will pay for and when that comes back they will tell you how much they are willing to refinance. They may require a new survey if you cannot provide one which you will also pay for. The loan will go through underwriting and if approved, go to closing. There are closing costs just like any other loan but they are usually much less for a refinance because there are no commissions or taxes being paid. Sometimes the lender will allow you to roll these into the loan if there is enough equity. Then they pay off the old loan, you sign a new note and deed of trust, and a new deed is recorded as well as the old lien being removed. 

As for numbers everything @Hadar Orkibi said is correct for a cash out refi. A normal refi does not give you any money back, you just keep the equity in the property.

@Hadar Orkibi thank you so much for the example and explanation! That makes a more sense seeing it that way... I guess a follow up question I didn’t know I had would be: so When your home goes up in value ($100k over 2 yrs in your example), and you only have 25% equity after 2 years (20% from down payment + 5% from extra 2 years of paying down), does that mean that you now have equity worth $100k (25% of $400k purchase price) or $125k (25% of $500k market value)? Or do you now have $180k of equity ($80k down payment + $100k of appreciation)? I’m thinking the last option but am not really sure. Thanks again, this is my first post on here and BP community did not disappoint!

@Hadar Orkibi  & @Peter M. I understand why an investor would pull out all of their equity to buy a larger property to generate momentum/wealth. However, from an asset management perspective, it seems like it is not wise to pull out all of the equity because you'll be over-leveraged with tons of debt on the books. Interested in hearing your opinion on how much (if any) equity should you keep in the property when refinancing. 

@Larry Caper I don't advocate to pull out all the equity. @Michael Bentz asked about refinancing and how it works,  so I gave a simple example so it is clear to understand. 

In-fact I just did a BRRRR and created over 50% new equity but left it all in.

Pulling equity is a good idea if you don't max it up to the hilt. say 70% to Valuation is fair bet. Also, make sure that it will not affect the cash flow. 

Sometime you can refinance, pull money out, and have a new loan with better terms and better cash flow.

I've been looking into this a lot lately and found a lot of good information and calculators on Zillow about refinancing. I was surprised they had a lot of good things to look at about it including articles about different issues.

https://www.zillow.com/refinance/