New Investor: What is Refinancing and how does it work?
I'm a newbie to real estate and investing, can someone please explain to me what refinancing is and how it works?
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.
@Chris Armstrong
Have a question on your first BRRR for someone just starting out with not much cash or partnership to purchase a house in cash is it possible if the numbers right to use hard money to purchase the property then rehab it with my own cash then refinance to pay back the hard money? Also if you use hard money do you still have to wait the typical 6-12 months to be able to refinance?
I have def heard about using hard money to do these deals. I am not 100% sure about the time limits between buying and refinance.
Thanks for the reply Chris, congrats on getting your first BRRRR