What Is Refinance?
A refinance means you're swapping your current mortgage for a new one. You might do it to get a lower rate (rate-and-term refi), to pull cash out (equity extraction), or to change your loan term. For BRRRR investors, the refinance is the critical step — you buy with hard money, rehab, rent, then refinance at 70-75% LTV on the post-rehab value. That new loan pays off the hard money and returns your capital. The property stays in your portfolio generating cash flow; your money is free for the next deal. The catch: refinancing resets amortization — you start the interest-heavy phase again. And closing costs (2-5% of loan amount) mean you need a meaningful rate drop or cash-out to justify it.
Replacing an existing loan with a new one—often to secure a lower interest rate, change terms, or extract equity.
At a Glance
- What it is: Replacing your current loan with a new one — same property, new terms.
- Why it matters: Lower rate = lower payment. Cash-out = access equity without selling.
- Rate-and-term: Same balance, new rate or term — no cash out. Lowers payment or shortens payoff.
- Cash-out: Borrow more than you owe — pull equity for renovations, next deal, or other use.
- BRRRR exit: Cash-out refinance at 75% LTV recovers capital after rehab.
How It Works
You have a loan. You replace it with a new one. The new lender pays off the old loan at closing. You now owe the new lender. Simple in concept — the nuance is in why you're doing it and what it costs.
Rate-and-term refinance. You're not pulling cash out. You're refinancing the existing balance for a lower rate or different term. Maybe you bought at 7.5% and rates dropped to 6.5%. A refinance saves you 1% on the payment — on a $200,000 loan, that's roughly $130/month. Over 30 years, that's $46,800 in interest savings. The math: you'll pay closing costs ($4,000-$6,000) — how many months of savings to break even? $4,000 ÷ $130 = 31 months. If you're holding 5+ years, it pencils. If you're selling in 2 years, probably not.
Cash-out refinance. You're borrowing more than you owe. The property's worth $250,000 — you owe $120,000. At 75% LTV, you can borrow $187,500. Pay off the $120,000, and you pocket $67,500 minus closing costs. That's the cash-out. You use it for the next BRRRR deal, a renovation, or whatever. The trade-off: your new loan is larger, so your payment goes up. The property needs to cash flow with the new payment — run the DSCR before you refi.
BRRRR refinance. This is a cash-out refinance with a specific purpose. You bought with hard money, renovated, placed a tenant. Now you refinance into a 30-year DSCR or conventional loan at 75% LTV on the appraised value. The new loan pays off the hard money. If you bought right and rehabbed on budget, the refinance returns most or all of your capital. You're left with a cash flowing rental and your money back for the next deal. The amortization schedule resets — you're back to paying mostly interest in the early years. But that's the cost of recycling capital.
Real-World Example
Memphis BRRRR. You buy a 3-bed for $88,000, rehab for $36,000. All-in: $124,000. Hard money at 12% for 6 months.
Post-rehab, the property appraises at $168,000. You place a tenant at $1,400/month. Six months after purchase, you refinance with a DSCR lender: 75% LTV, 7.5% for 30 years.
Loan amount: $168,000 × 0.75 = $126,000. That pays off the hard money ($124,000) and covers closing costs ($4,200). You get $2,200 back at closing — capital recovered plus a small surplus.
New payment: $881/month. NOI after expenses: ~$950/month. DSCR: 1.08x. Tight, but the lender approves. You've recycled your capital. The property cash flows. You take the $124,000 and start the next BRRRR cycle.
If the appraisal had come in at $155,000: Loan = $116,250. You'd need to bring $7,750 to closing to pay off the hard money. Capital left in the deal: $7,750. Your cash-on-cash return would still work, but you didn't get the full recycle. That's why conservative ARV estimation matters.
Pros & Cons
- Lower rate = lower payment — frees up cash flow or shortens payoff.
- Cash-out = access equity without selling — fund the next deal or renovation.
- BRRRR capital recycling — refinance is how you get your money back and repeat.
- Change loan term — go from 30 to 15 years if you want to pay off faster.
- Remove PMI — if you've built enough equity, refinancing can drop mortgage insurance.
- Closing costs — 2-5% of loan amount; need savings or cash-out to justify.
- Resets amortization — you start the interest-heavy phase again; total interest paid over life of loan can increase.
- Rate environment — if rates are higher than your current loan, refinancing doesn't make sense.
- Seasoning — lenders often require 6-12 months before refinancing an investment property.
- Appraisal risk — low appraisal shrinks your cash-out or kills the refi.
Watch Out
- Modeling risk: Don't assume 75% LTV on the refinance. Some DSCR lenders cap at 70%. That 5% gap on a $200,000 appraisal is $10,000 less capital recovered. Line up your refinance lender before you close on the purchase — know their LTV cap and seasoning requirements.
- Execution risk: The appraisal controls your loan amount. If it comes in low, your BRRRR math breaks. Estimate ARV conservatively. Have a backup lender if the first one's appraiser is notoriously tough.
- Exit risk: Refinancing resets your amortization clock. If you're 10 years into a 30-year loan, you've paid down a lot of principal. Refinancing to a new 30-year loan puts you back at square one — you'll pay more interest over the full term. For rate-and-term refis, make sure the rate drop is worth the reset. For BRRRR, the reset is the price of capital recycling — you're trading amortization for velocity.
Ask an Investor
The Takeaway
A refinance replaces your current loan with a new one. Do it for a lower rate, to pull equity out, or to change terms. For BRRRR investors, the refinance is the exit — you recover capital at 75% LTV and redeploy it. The cost: closing costs, reset amortization, and the risk of a low appraisal. Run the numbers before you refi. For rate-and-term, calculate the break-even. For cash-out, run the DSCR on the new payment. If it pencils, refinance. If it doesn't, hold.