Rate and Term Refinance?

[Jose Jusino]

Hi BP! 

I was doing research on the BRRR Strategy and I got stuck on the Refinance part. I've been reading around for information on different types of loans and refinancing and I know that most types require a seasoning period of about 6 months.

I've also read that a Rate and Term refinance does not usually require a seasoning period so it seems to be a more "BRRR-Friendly" type of refinance.

My question is, what are the pros and cons of this type of refinancing? Many of the sites mentioned "Rate and Term" having pros and cons but none were actually listed.

[Chris Mason]

Originally posted by @Jose Jusino:

Originally posted by @Chris Mason:

Hi @Jose Jusino,

It's pretty unlikely that as a first time investor you will actually turn a beat up property around in less than six months, making it a moot point.

But what you've read is correct. If you buy using financing, you need to wait six months to do a cash out refinance. 

There are some ninja "202" level ways to avoid that, but I'd suggest sticking to "101" level for your first rodeo. People trying to skip entry level techniques for Ph.D level almost always either don't do anything because that amazing deal with the stars and the moon lining up never presents itself, or they lose their asses because they thought it lined up, but they overlooked some minor detail that turns out to be critical.

Like I said, pragmatically your first rodeo is going to take six months anyways. Making it a non-issue.

I agree, @Chris Mason. I'm definitely not trying to jump straight into "Ph.D level" techniques. Just trying to learn about the different options.

The reason I asked the question is because I've been reaching out to many different people. Realtors, lenders, etc, and trying to learn as much as possible. Sort of pick their brains a bit. I was speaking to a hard money lender yesterday and they mentioned that their loans are for 5 months. Knowing that most lenders require a 6 month seasoning period, I dug deeper and found "Rate and Term Financing" and was curious as to what the Pros and Cons of this financing might be.

 Big con is that with a rate/term refinance, by definition you aren't pulling any money out. You're simply replacing an existing crummy mortgage with a new better mortgage at ballbark the same loan balance. At which point you go "oh ok I'll just do the cash out refinance later," and then you go "oooh but now I am paying THREE sets of mortgage closing costs" (purchase, rate/term refi, then cash out refi) at which point you go "naaaah I'll just wait the six months and stick to two sets of closing costs... another month or two at the higher rate is cheaper than another set of closing costs."

But wait, it gets better!

The reason a HML does a 5 month term, knowing the rule for a cash out is six months (assuming you want an A paper Fannie loan), is because this lets them hook you on the 1-2 month "extension fee".... which will be approximately similar to that 3rd set of closing costs. Tell the HML to suck it, you want 8 months minimum before a balloon is due. Or find another HML if they balk. Judging from the volume of spam in my inbox, HML are a dime a dozen.

So there you go, that's I believe what you were trying to scratch to find out. Turns out the HML does this for a living and is working profit maximizing angles you didn't even realize existed.