I keep hearing people talking about refinancing houses that are already paid in full. Can someone please explain why I would want to do that?
Big asterisk to this, I’m still new at this... but you are turning the equity in the “paid for” property in to liquid cash you can use to go buy more property. If it’s an income generating property, you get that pesky monthly payment down under what the rent income is, and pocket the spread. Minus what your management and maintenance costs of course.
Put that money to work!
This would only be worth it if you use that equity money to find deals that would cash flow enough to cover the refinance payments as well.
I am currently doing this in California, where I pulled equity out of my house (250K worth of equity) and used it to build an ADU. I owe roughly 1000 a month to pay back the equity loan, but i can rent out my ADU for 2500 a month, netting about 1200 a month with expenses. That is free money!
That makes sense.
The US has digitally printed a lot of money in the last 12 months.
If you believe there will be a resulting increase in inflation, then borrowing today's dollars (at a fixed rate) to invest in hard assets which will appreciate, and paying the loan back in tomorrow's cheaper dollars makes sense.
Even with current inflation levels, it makes sense, especially given low interest rates.
Would you rather pay me $1,000 today or $1,000 in 10 years? Making the $1,000 payment in 10 years will be easier. If you purchase income-generating property where rents over time, it will be easier still to make the $1,000 payment.
I agree with Chris's reasons and Joseph gave a good example. It would cut your cash flow in the current property, so it only makes sense if you'd still have room to borrow money and the combined income from both places is higher. Don't forget that the tenants are also paying down the mortgage.
If you aren't planning on buying more properties or investing that money where you'd get a higher rate of return, there is nothing wrong with having a place paid off. I don't pull money out of my places. As I get closer to retirement, I like knowing that I could sell a rental if I wanted and instantly have the equity.