How we’ve used refinancing to advance financial goals
by Garrett
Depending on how long you’ve been following The Grit and Polish, you may (or may not!) know that we fixed up a hand-full of houses before landing at our present country home in rural Washington state. During the previous decade, we collected and renovated 4 houses in Seattle over about eight years, keeping them as cash-flowing rentals. And the only way we were able to do this was through mortgages and refinancing. We’ve done every kind of refinance you can imagine - conventional, cash-out, FHA-to-conventional, 30-to-15 year, delayed financing, etc. In each case we used a refinance to advance our financial goals and today we wanted to walk through these examples in case they could be helpful for your own situation.
*This post is sponsored by Refily, a technology-driven lender comparison marketplace. Refily provides transparent, tailored choices that that are designed to fit each individual borrowers’ needs—all without having to give an SSN. (NMLS# 167283)
We purchased our first house in Seattle with an FHA loan and very little down. Like $17K on a $445,000 mortgage little. In situations like these when the down payment is much less than 20%, private mortgage insurance or PMI is a thing. Basically PMI is an additional charge added onto the mortgage payment to mitigate the added risk to the lender due to the small down payment. This part of the payment drops when the loan balance reaches 78% of the original appraised value which could be more than a decade for a 30 year loan! You can also petition to have it dropped if the home increases in value. In our case we renovated and then refinanced. Due to our improvements, the refinanced loan amount was down to 80% of the new value so we were able to get rid of the PMI within just a few years.
At the Ravenna house we used a financing strategy that isn’t very well known and while it’s not technically a refinance, it’s related. The loan type is called delayed financing. Due to the condition of the home, the sellers were only considering cash offers. We didn’t have $275,000 in cash - not even close! So we tapped our family. We drew up short-term loan contracts with 3 different family members (our family is awesome!) and purchased the property for cash. We then renovated the main floor of the house in 6 months (our old pace of renovating exhausts me now ;)-and were able to get a bank loan through the delayed financing product. I won’t detail the particulars here but essentially one can do a cash-out financing within 6 months of closing for an amount up to the original purchase price. It’s a rare thing, but a great tool and we were able to pay back our family loans with interest!
The Dexter house was a pretty classic example of the BRRRR real estate strategy which stands for Buy Renovate Refinance Rent Repeat. It’s a strategy we’ve used a few times and a great way to go from one house to two or three or more. We purchased the Dexter House (our fourth and last home purchase in Seattle before moving to the Farmhouse) for $440K, with a standard 80/20 30-yr mortgage. It was a short-sale and a drawn-out headache, but after we finally closed, we renovated the house for about $40K cash. The house then appraised for $600K and we were able to execute a cash-out refinance, with the new mortgage amount being 80% of the higher appraised value, or $480K. We walked away with $120K in cash, returning all the cash we had tied up in the property and giving us the capital to buy the Farmhouse!
Our most recent refinance was just last year at the Farmhouse! With rates reaching all-time lows, we wanted to take advantage. We were able to trade our 30yr mortgage for a 15yr with only a small increase in monthly payment. This move lowered the total interest paid over the life of the loan by more than 50%.
Through all of these refinances, we’ve learned that you find the best rates when you shop around. We did our first refinance with the same bank we used for the original mortgage without shopping around and that was a total rookie mistake and we ended up with a higher interest rate for the life of that mortgage! Now when we’re looking for financing, we go right to a comparison marketplace like Refily!
Thanks to Refily for sponsoring this post!