What is refinancing?
There may come a time in a homeowner’s life when he or she decides that he or she wants a new mortgage. So, he or she runs to the bank, and the bank says, “I’ll pay off your old mortgage and give you a new one equal to the amount your house is now worth.” Many middle class and poor get themselves into trouble, because they refinance an appreciated property to get a chunk of money to pay off their bills with. They pay off those bills, yes, but then they get right back into debt. Unfortunately, now they owe the money on their new bills, and they still owe money on the new mortgage, as well. They are worse off than before. This is a very poor person’s move, no matter how big the dollar amounts.
A middle class move is to use it to acquire a lower interest rate, thereby lowering the monthly payment the homeowner has to pay. This is good for most purposes, if used wisely.
It can be used by an investor who has been buying investment property, as well. When used as an investment tool, refinancing is very powerful. Everyone wants to make the best investment possible, right?
When to Refinance an Investment Property
Let’s walk through a scenario when it might be a good time refinance an investment property. Let’s say you have bought a piece of property, and you have been renting it out. You have repaired the property investment to a like-new status, and now your previously $100,000 property is worth $120,000.
You are out and about looking for new property deals, and you find one that is just irresistible. You could do it if you put no money down, but no lenders will approve you for no money down. But, all is not lost. You could refinance, and use this difference between what the home is worth now and what the old mortgage had on it as a down payment on your new property.
Refinancing with an investment mortgage is not something you should do without some research, as you can get yourself into big trouble if you do not know what you are doing – just like rental property insurance or anything of the sort. The outcomes can be potentially disastrous, but refinancing can also be a very powerful tool to help you get much richer, much faster. So, you can be poor, and refinance to pay off bills. You can be middle class, and refinance to get a lower monthly payment (sometimes the rich do this on their investment properties as well). Or, you can be rich, and refinance to get more investment money on a home you have increased your equity in.