What is a Refinance?
A refinance replaces your existing mortgage with a new one, typically to secure a lower interest rate, change the loan term, switch from adjustable to fixed rate, or access equity (cash-out refinance). The new loan pays off the old loan, and you begin making payments on the new terms. Refinancing involves many of the same steps as the original purchase: application, appraisal, underwriting, and closing.
Refinancing costs 2-5% of the loan amount in closing costs, including origination fees, appraisal, title insurance, and recording fees. The break-even point (when monthly savings exceed closing costs) typically ranges from 18-36 months. If you plan to keep the property longer than the break-even period, refinancing to a lower rate is usually beneficial.
Types of refinance
Rate-and-term refinance: Changes the interest rate, loan term, or both without taking cash out. Used to lower monthly payments or pay off the loan faster.
Cash-out refinance: Replaces your mortgage with a larger one and gives you the difference in cash. Used to access accumulated equity for other investments, renovations, or debt consolidation.
Streamline refinance: Simplified refinance available for FHA and VA loans with reduced documentation and no appraisal requirement. Designed for quick rate reduction with minimal hassle.
Refinancing and the BRRRR strategy
Refinancing is the third R in the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat). After purchasing a distressed property, renovating it, and placing a tenant, the investor refinances based on the new, higher appraised value. The cash-out proceeds are used to fund the next property, allowing rapid portfolio growth with recycled capital. Successful BRRRR execution depends on creating enough forced appreciation through renovation to recover most or all of the invested capital upon refinance.