Two common types of refinancing in commercial real estate

On Behalf of | Sep 13, 2023 | Real Estate Transactions | 0 comments

Refinancing can be a useful tool for entrepreneurs interested in real estate development. It can help you make a few improvements or repairs that might allow you to rent the property out for more than you paid. If you improve the property, it opens up opportunities for you to pull out cash, reimburse yourself, repay investors, invest in another property and repeat the process.

Rate-and-term refinancing

Rate-and-term refinancing involves replacing your existing mortgage with a new one. If you want to reduce the term of your loan, this can enable you to expedite your mortgage repayment and build equity in your home more quickly. This new mortgage enables you access to more favorable terms, such as:

  • Lower interest rate
  • Lower monthly payments
  • Shorter loan term

The goal of rate-and-term refinancing is to help you save money on your mortgage. Since this type of refinancing allows you to pay with lower interest rates and monthly payments, it can free up more of your monthly budget for other expenses, savings or emergencies.

Cash-out refinancing

Cash-out refinancing can be a valuable solution if you need access to the equity you have built up in your property. With cash-out refinancing, you take out a new mortgage larger than your existing one and receive the difference in cash. Depending on your circumstances, you may obtain this type of refinancing if you need:

  • Access to cash
  • Reduced interest rates than credit cards or other personal loans
  • Potential tax benefits

This could be a more attractive type of refinancing if you need access to cash. You may use that cash for different goals like improving your home, combining your debts or investing in other real estate opportunities. One important thing to note is that this type gives you higher interest rates and longer loan terms than the other.

To compare, rate-and-term refinances your mortgage to help you save money, while cash-out refinancing gives you access to cash you may spend on different goals. Depending on your situation, either option could work for you. It ultimately depends on how you want to reach your goals in real estate development.