Refinancing replaces an existing property financing with a new one. Owners refinance to improve terms, reduce periodic payments, consolidate obligations, or access built-up equity for other uses.
The process resembles an original purchase financing, but the existing financing's terms : especially any prepayment provisions : shape what is possible.
How it generally works
The new lender underwrites the property and borrower much as in a purchase: valuation, income, financials, and equity position. At closing, the new financing pays off the old one.
Check your existing agreement for prepayment penalties or defeasance requirements before pursuing a refinance : these can materially affect the math.
Common reasons to refinance
- Securing a lower cost or better terms as market conditions change
- Reducing periodic payments to improve cash flow
- Combining a first and second position into one structure
- Accessing equity for renovations, expansion or other needs
- Moving from a variable structure to a fixed one, or vice versa
What lenders commonly evaluate
- Current property value via a new appraisal
- Property income, occupancy and operating expenses
- Borrower financials and payment history on the existing financing
- The existing financing's balance and prepayment terms
- Debt service coverage on the proposed structure
Potential advantages and trade-offs
Advantages: can meaningfully improve cash flow and terms, unlock equity for productive uses, and simplify multiple obligations.
Trade-offs: closing costs, appraisal and other fees apply, and extending the term can increase total cost over the life of the financing even when payments fall.
How repayment is typically structured
Structures mirror purchase financing : amortizing payments over a set term, sometimes with balloon features. Compare the full schedule and total cost against your existing arrangement, not just the periodic payment.