How do I refinance? from a lender.

Question

1. Can someone explain the step by step basis on how to refinace?

2. Why do people buy the property first and then refinance? Couldn't they say, "Hey bank what will the apprasial value be if I did this....Could I get this much money?"

Elise Marquette · Answer

Refinancing process - Purchase the property. In most cases you have to wait 6 months to refinance but there are loans out there with no seasoning requirement. Assuming that you used financing to purchase the property, you will basically be replacing the purchase loan on the property with a new loan. For example, if you purchased and then rates went down, you could refinance into a lower interest rate. If you have equity into the property you could possibly take cash out. Sometimes in low rate environments like this, you can both lower the rate (i.e. lower your monthly payment because less of the payment is going towards interest!)

In most cases, an appraisal is required. The BRRRR method is effective because the property increases in value from the time you purchase to when you go to refinance. If you hit a good deal, you should be able to get all or most of your money out of the property and be ready to roll it into the next property. When you close the refinance, the new loan pays off what you currently owe on the property and then you'll just make monthly payments in accordance with the terms of the new loan.

For your second question, lenders must lend based on the appraised value or the purchase price. Whichever is lower. One of the big issues in 2008 was lending more money than the property was worth so many people were upside down on their homes. Lenders do not lend on hypotheticals. It would be too easy for someone to say "Hey I'm buying a 100K property, doing 75K of renovation and it will be worth 250K." and then never do the renovations and pocket the cash. And then they have a property worth 100K and owe 175K on it. Then if they are dishonest enough to pocket the cash, how likely is it that they are actually going to make the mortgage payments? Probably not very likely.