How does refinancing work?

Alright…I’m embarrassed to ask this question so please be gentle. Complete newbie ignoramus question: How exactly does it work when you “pull money out” by refinancing? Are you actually taking out another loan against that equity in the form of a 2nd mtg, or HELOC? If so, “pulling money out” seems like a misnomer, in that you’re not really pocketing that equity but just borrowing more.

Could someone please explain to a dunce? :stuck_out_tongue:

"pulling money out" seems like a misnomer, in that you're not really pocketing that equity but just borrowing more.


I don’t think that you are confused at all. When you refinance, whether it is a first, second, or HELOC, you are borrowing money against the property. If the property is a rental, that results in your mortgage payment(s) being higher (unless you lengthen the loan or get a lower interest rate). If you borrow too much, your cash flow can suffer or disappear entirely.

With my rentals, I never borrow more than 70% of the market value and then I don’t refinance to pull out more monoey (because I’m looking forward to the huge cash flow in a few years when the properties are paid off).

Hope this helps,


Thanks Mike; that does help, and sort of keeps making me wonder about “pulling money out” in the case of rehabs with the market like it is, at least for full ARV. (I think I’ve read far too many posts this morning)

What started making me think is that I’m sitting down this morning to write out a plan for the next few months and years, tentatively based around when my divorce is finalized May 1 and hopefully my house in SC sells/closes and I have some capital to work with. Fun chore, but highly anticipated days.

I understand. The lingo makes it sound like it is free money. It is just money that you would gain if you sold the property. You do have to pay for the money in monthly interest payments. It is just money you can have on hand to buy another property quickly.

Yes…and there’s no tax on borrowed money!


On most loans, you’re only allowed to cash out 70% LTV on a first mortgage although you can do a purchase with 80% LTV on a first.

If you want more cashout, you’d have to do it via a 2nd mortgage and those interest rates are higher, probably in the 8-9% range depending on your credit.

For example, if you have a house appraised at 200k, you can take up to 140k out on a first mortgage. That means if you have a 100k mortgage, you pay off the 100k and you get 40k left over to put in your pocket. Now if you got that 100k mortgage at 5% a couple of years ago, the rates now will be like 6.25% or somewhere around there so you may not want to do that. Of course there’s always fees and all that so you’d end up with a little less than 40k. People sometimes will still go ahead and refinance because they have 18-20% non-deductable interest rates on their credit cards so even though they lose the lower rate, they still save money overall.

You have to pay off the first mortgage in order to get a new mortgage that’s in the first lien position and hence get the best rate.