Refinance
Replacing an existing loan with a new loan — often to access equity, lower the rate, or change loan terms.
Definition
Refinancing means paying off an existing loan with a new loan — usually from a different lender or with different terms. Investors refinance for several reasons: to lower the interest rate and reduce monthly payments, to access equity through a cash-out refinance, or to change from a short-term loan (hard money) to permanent financing.
The cash-out refinance is central to the BRRRR strategy. After buying and rehabbing a property, the investor refinances at the new (higher) appraised value — pulling out equity in cash. This allows the investor to recycle capital into the next deal while retaining the rental property.
Refinancing costs money: origination fees, appraisal, title work, and potentially prepayment penalties on the existing loan. Calculate the break-even point — how long until the monthly savings (from a lower rate refi) offset the closing costs. For cash-out refis, assess whether the extracted capital can be deployed into returns that exceed the higher loan balance's carrying cost.
Related Terms
BRRRR Method
Buy, Rehab, Rent, Refinance, Repeat — a strategy to recycle capital into multiple rental properties.
Loan-to-Value (LTV)
The ratio of a loan's balance to the property's appraised value, expressed as a percentage.
Equity
The difference between a property's market value and the outstanding balance of all loans against it.
Appraisal
A licensed professional's independent estimate of a property's market value.
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested, expressed as a percentage.
Bridge Loan
Short-term financing that bridges the gap between purchasing a property and securing permanent financing.