Loan refinancing is the replacement of an existing loan with a new loan. There are a couple of different types of loan refinances and the reason behind the refinancing dictates the type. There are Cash-Out Refinances and Rate and Term Refinances
A cash out refinance is for the borrower who wants their equity working for them right away. As part of a Cash-Out Refinance a borrower may obtain a better interest rate and/or term then his existing loan, just like in a Rate and Term Refinance. However if the borrower walks with more than a couple thousand dollars cash then it will be deemed a Cash-Out Refinance.
A Cash-Out Refinance converts real estate equity into cash. A Cash-Out Refinance pays off the current loan and replaces it with a newer larger loan. The difference between the current loan’s payoff and the newer larger loan (less closings costs) is paid in cash to the borrower.
How much cash you can take out of a property depends on the current loan balance, the property’s fair market value, and the lender’s LTV requirements.
For a Cash-Out Refinance a hard money lender can typically lend on any type of property, including a primary residence, so long as the loan is primarily for a business, investment, or commercial purpose.
Rate and Term Refinance
The reason behind a Rate and Term Refinance is for the borrower to obtain what the borrower thinks are better loan terms. Those better loan terms typically include a better interest rate and/or an extended loan term. Perhaps your Rate and Term Refinance can lower your interest rate and monthly payment or perhaps it can convert a two year interest only balloon loan into a 30 year fully amortizing loan.
Rate and Term Refinances are one of the primary exit strategies for paying off a hard money lender. You find a great investment property, but you need to close quickly so you take out a hard money loan and purchase the property. After you get the property rented and tie up some loose ends, it may be time to seek more conventional financing from a bank, hence a Rate and Term Refinance.
In a Rate and Term Refinance the new loan amount is equal to the old loan’s current balance plus the cost of closing and recording the new loan. A borrower in a Rate and Term Refinance cannot get any substantial cash out of the refinancing. Typically, all a borrower can get out of a Rate and Term Refinance is a couple thousand dollars and if perhaps things are timed correctly the borrower may be able to roll one or two mortgage payments into the new loan.
A hard money lender will typically only do a Rate and Term Refinance on an investment or rental property and not on a primary residence.
Conventional lenders typically will charge higher interest rates and points for a Cash-Out Refinancing then for a Rate and Term Refinancing. When a borrower takes out substantial equity as part of a Cash-Out Refinancing, conventional lenders become concerned that the borrower may simply walk out.