Question about refinancing

3 Replies

I have been told that you should only refinance when rates are low or if you need the money to use for another investment.

What if rates are low and there is are not a lot of listings on the market. Is it a good idea to just do a refi and put the money aside for future opportunities?

There are a lot of other reasons to refinance in addition to low rates and investing in other properties.

For one, if you don't need the money in at least five years, you can invest in an SPYDER index fund or something similar. If you can get 10% APY while only 2.5-3% on your mortgage, you pocket the 7-7.5% difference. Of course, the market can crash so that's why you really need to be able to keep it in the market long-term.

Two, when you refinance, you're kind of protecting yourself from lawsuits and foreclosures. You protect yourself from lawsuits because, while anyone can sue you for just about anything, no lawyer is going to take a case against someone that has nothing but debt -- also another reason to use LLCs for everything because "corporations are people."

And you protect yourself from foreclosures because banks will foreclose on houses that have higher equity because they can get they're money easier. It really sucks because those people have been paying their mortgage for years and they'll be given very little leeway.

For example, back in 2009 when the market crashed, my parents and their neighbors of 20 years went through very similar problems with the same bank. Their houses were pretty much the same value of about $750K at the time. But my parents always refinanced about every three years and most recently in 2008.

Then both my parents and their neighbors got laid off for around a year. Now, because the market was tanking, my parents did not take any money out of their stocks because the value we depressed. Instead, they just stopped paying their mortgage and didn't receive a foreclosure notice for almost two years because they only had about $150K in equity.

And when they finally reached out to bank to renegotiate payments, the bank worked with them because the bank could see the market was still plummeting and that they likely wouldn't be able to sell the house for $500K much less the difference of $600K.

On the other hand, their neighbors would refinance when rates dropped but they never took out any equity over 20 years. They probably paid $275K back in 1988 and by 2008 their house was worth about $750K. So, they had at least $500K in equity in 2008.

They received a foreclosure notice within three months of non-payment and they lost their home within another three months. Even worse, the house only sold for like $400K so they essentially lost $100K in addition to their house.

And now, my parent's house will be worth almost $2M once their renovation is complete in a couple of months which they did by refinancing it again, pulling out money to renovate it like they do every 10-15 years, and they bought a luxury STR in Gulf Shores, AL.

Finally, in another example, a friend of mine has a house in East San Diego County that burned down in one of the major fires about five years ago that also burned 150+ homes. Because he constantly refinanced, pulled money out, and put it in other investments, when his house was burned down, he was able to call contractors to rebuild his house before anyone else because he didn't need to wait for an insurance payout like everyone else.

Instead, he just sold off some stocks, rebuilt his house, and then got his payout from the insurance company -- which took over six months to get. By the time everyone else had received their insurance payouts, there were no contractors available but my friend's house was nearly rebuilt.

Also, it's always good to have some cash on hand because you never know when a killer deal is going to pop up that you can jump on while everyone else is trying to figure out where to get the money.

So, my opinion, and the opinion of just about everyone here on BP doing BRRRR method, is to refinance all the time even if rates are higher in the future.

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Originally posted by @Ed Brancheau :

There are a lot of other reasons to refinance in addition to low rates and investing in other properties.

For one, if you don't need the money in at least five years, you can invest in an SPYDER index fund or something similar. If you can get 10% APY while only 2.5-3% on your mortgage, you pocket the 7-7.5% difference. Of course, the market can crash so that's why you really need to be able to keep it in the market long-term.

Two, when you refinance, you're kind of protecting yourself from lawsuits and foreclosures. You protect yourself from lawsuits because, while anyone can sue you for just about anything, no lawyer is going to take a case against someone that has nothing but debt -- also another reason to use LLCs for everything because "corporations are people."

And you protect yourself from foreclosures because banks will foreclose on houses that have higher equity because they can get they're money easier. It really sucks because those people have been paying their mortgage for years and they'll be given very little leeway.

For example, back in 2009 when the market crashed, my parents and their neighbors of 20 years went through very similar problems with the same bank. Their houses were pretty much the same value of about $750K at the time. But my parents always refinanced about every three years and most recently in 2008.

Then both my parents and their neighbors got laid off for around a year. Now, because the market was tanking, my parents did not take any money out of their stocks because the value we depressed. Instead, they just stopped paying their mortgage and didn't receive a foreclosure notice for almost two years because they only had about $150K in equity.

And when they finally reached out to bank to renegotiate payments, the bank worked with them because the bank could see the market was still plummeting and that they likely wouldn't be able to sell the house for $500K much less the difference of $600K.

On the other hand, their neighbors would refinance when rates dropped but they never took out any equity over 20 years. They probably paid $275K back in 1988 and by 2008 their house was worth about $750K. So, they had at least $500K in equity in 2008.

They received a foreclosure notice within three months of non-payment and they lost their home within another three months. Even worse, the house only sold for like $400K so they essentially lost $100K in addition to their house.

And now, my parent's house will be worth almost $2M once their renovation is complete in a couple of months which they did by refinancing it again, pulling out money to renovate it like they do every 10-15 years, and they bought a luxury STR in Gulf Shores, AL.

Finally, in another example, a friend of mine has a house in East San Diego County that burned down in one of the major fires about five years ago that also burned 150+ homes. Because he constantly refinanced, pulled money out, and put it in other investments, when his house was burned down, he was able to call contractors to rebuild his house before anyone else because he didn't need to wait for an insurance payout like everyone else.

Instead, he just sold off some stocks, rebuilt his house, and then got his payout from the insurance company -- which took over six months to get. By the time everyone else had received their insurance payouts, there were no contractors available but my friend's house was nearly rebuilt.

Also, it's always good to have some cash on hand because you never know when a killer deal is going to pop up that you can jump on while everyone else is trying to figure out where to get the money.

So, my opinion, and the opinion of just about everyone here on BP doing BRRRR method, is to refinance all the time even if rates are higher in the future.

Thank you for your response. It makes a lot of sense to be constantly pulling out cash out of your investments. I never heard of refinancing as a protecting against foreclosure, but in the way you explain it, it makes a lot of sense. The bank is less likely to foreclose on a property that has so little equity.

Correct me if I am wrong, but as long as an invest property is full occupied and has consistent cashflow, a higher rate should not be considered an obstacle because the tenants are paying for the mortgage. However a higher rate means that monthly payment is going to be higher which impacts the cashflow.