3 Ways to Build Wealth Through Refinancing Your Real Estate

Savvy investors know there is a multitude of ways to build wealth through real estate, outside of just buying low and, hopefully, selling high. If selling is an option, then selling during thisseller’s marketis the perfect opportunity. But is there a way to build wealth even if youdon’twant to sell?

With interest rates as low as they are, there’s another way to build your wealth and that’s through refinancing. Here are three strategies to explore:

Strategy #1: Refinance your existing loan, with the same interest rate, and the same amortization period.

Why on earth would you refinance with the same interest rate if you can get a lower rate now than at the start? You wouldn’t. However, we won’t always have these historic low interest rates, so it’s good for you to see the impact of simply refinancing your existing loan.

Below is a chart showing how a 30-year loan of $500,000 at a 6.75% interest rate with an annual mortgage of about $29,000 would pan out over 10 years.

However, if you refinanced at year 5 for the remaining balance of your loan, with the same interest rate, and amortization period, here would be your new loan payment:

That’s a 6.34% decrease from your original annual mortgage payment and a net saving of almost $12,445 from year 6 to year 10. Granted, your loan is paid off more slowly because your mortgage rate is smaller. However, it’s not an issue if you’re in it for the long haul.

Strategy #2: Refinance your existing loan, with a lower interest rate, and the same amortization period.

Here’s where it gets fun! If we have a lower loan balance and interest rate, that’s when we’ll start to see asignificantreduction in our annual mortgage payment.

After refinancing, now we see a 35% reduction in our annual mortgage payment and a net savings of about $69,000  from year 6 to year 10. As a bonus, our ending home loan balance is smaller. Wey less while having a lower mortgage payment because our interest rate payments are significantly less. Thus, we’re paying more principal and less interest.

Strategy #3: Refinance to extract equity while refinancing at a lower interest rate

Suppose the home you purchased at $500,000 appreciates on par with inflation at 3%. We can expect our property to be worth about $579,637 at year five:

What would happen if we refinanced at the property’s new value and paid off our existing loan?

A few things:

1. We could extract approximately $111,000 worth of equity to reinvest in another real estate opportunity.
2. Even with the extracted equity, we decreased our annual mortgage payments by about 19% for a savings of approximately $38,000!
3. Our ending loan balance would also increase.

The amount of equity you have depends on yourhome’s current value, and what you have remaining on your mortgage loan balance.

Bottom Line

If you’re not looking tosellbecause you’re in it for the long haul, it doesn’t mean you are sidelined from the wealth-building game. Right now is a great time to refinance to either lower your payments and or lower your payment while extracting equity so that you can perhaps in another real estate investment.

There is a caveat to this and that is timing is everything. Meaning, it depends on where we are in the real estate cycle. Refinancing to lower your monthly payments is a great strategy for all phases of the real estate cycle, however, it is very difficult to do in the middle of a recession. Furthermore, extracting equity to buy another home at the peak of the market is extremely risky if the property value in the new home slumps. You will definitely want to do your research to find out where prices are going. If you have questions about it, reach out to us as we’d be happy to help you strategize how to maximize the wealth of your real estate portfolio.

Thanks for reading, here’s a quick video that walks you through the three strategies: