Refinance: cash out vs buying equity

[Paul Kubin]

I was just daydreaming about refinancing (aren't we all?) and I wondered if there was a "buy equity" instead of "cash out" option during a refinance.  If not, I suppose you could cash out and then use the cash to pay down your principal by that amount. 

But when might it make sense to do that?  

Assume: 

- long term, single-family rental 

- market rate for rent with modest cash flow

- Refinancing makes $ sense (such as rates have dropped 2% or more since you mortgaged the property with 20% down)

[Ryan Muska]

Those "buy equity" options are definitely available. Here's an example:

You have 200k equity in a 500k house. You can refinance since rates have dropped. But now you also want to put an additional 100k towards the house leading to a better interest rate had you refinanced. Also the LTV will be 60% instead of 40%. This is no problem for a bank.

In terms of when it is a good time to refinance, that is up to the borrower. You may think it is a good choice to refinance when you save $100/month! Otherwise you may want to save $300/month! It's all up to the client and how much they are willing to spend in order to save a certain amount.