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Refinancing a loan is when you replace the current financing of a property with a new loan. For rental property owners, there are two main types of refinance loans: rate and term refinances and cash-out refinances. A rate and term refinance is when you refinance an existing loan in order to change the interest rates and/or terms of the loan. A cash-out refinance is when you replace an existing loan with a new loan for a higher amount, and the difference in cash is yours, or when you obtain new financing on a property that is currently not pledged on a loan.
Borrowers often use rate and term refinances to get better loan terms. For instance, some people refinance to get a lower rate and save money. Others refinance because they get a longer term, which should lead to a lower monthly payment and improve their rental property cash flow. And some lucky investors can refinance and do both. An investor that has a property on a short-term high rate bridge note can save money and lower their monthly payment by refinancing on a 30-year loan with lower rates.
Cash-out refinances, on the other hand, are a fantastic tool for real estate investors looking to grow their rental portfolios. The cash borrowers pull out of their existing rental properties --whether on a loan or not-- could be put toward another rental property, a rental property renovation, or even a flip.
Refinancing rental property loans clearly provides borrowers with lots of flexibility to tailor their investments to their needs. However, keep in mind that there are transaction costs including fees and closing costs associated with new loans.