When you’re refinancing a property soon after you originally purchased it, there are some tricks you can use to curb the costs while increasing your cash flow at the same time!

First you need to know that you generally have to wait 12 months before pulling any cash out during a re-fi.  This is how people often get at the equity that’s built up in their property.  They suck it out and then use that cash to buy another property.  If you re-fi before 12 months, you are limited to a “rate and term” re-fi.  This means the purpose of your re-fi is to get a better rate and/or different term.  We want to do a rate and term re-fi right after purchase in order to get into a pay option arm, even though we put only 5% down, which is less than the minimum 10% down it would take to get into this arm right from the get-go.  We don’t want to put 10% down because that’s more money out of our pockets than we need to spend.

During this rate and term re-fi process, tell your mortgage broker that you want to get the maximum cash back.  Wait a minute!  I just told you that you can’t pull any equity out.  This is true!  However, you can get a very small amount of cash back at closing.  In Arizona, I understand it to be about $2,000.  This is possible because the broker needs to apply for a specific amount of funds when submitting your loan.  He needs to estimate what the pay-off is for your current mortgage.  Estimating pay-offs is tricky business and you cannot get it exactly correct.  So he estimates, and he estimates high to be on the safe side.  Once he finds out what the exact pay-off amount was, it turns out that the amount of funds you were approved for and got with the new loan were a bit higher, and the difference comes back to you at closing.  At closing you get a $2,000 check!  That’s awesome!

Another trick you want to use is to time the closing of your re-fi just right so that you end up skipping a mortgage payment.  At one point you will make the last payment you will ever make on your current loan.  Soon after that, your re-fi closes, and you want the date of the first payment for your new loan to be something like 45 days from your closing.  The exact days will depend on when you close, but just tell your mortgage broker that you want to skip a payment and he will figure out when you need to close on the re-fi.

Thirdly, when you re-fi, you don’t want to pay for it out of your pocket.  You want the cost to refinance included in your new loan.  You will finance the loan fees just as you are financing the property.  Of course your appraisal needs to come in high enough to be able to support an extra $2-3k in the loan.

So there you have it.  Don’t pay for the re-fi, skip a payment, and get $2,000 back at closing.  What you’ve just done is improved your cash flow significantly for the year.  You’re still going to collect the rent during the month that you’re skipping the payment, so your cash flow that month will be great.  Then you can use the $2,000 that you got back at closing to pay part or all of your next month’s mortgage payment, or maybe multiple months depending on the amount of your payment.  After all, you did just re-fi in a pay option arm and your payments are now significantly less than they used to be.  AND, it cost you nothing to do all of this!

This financing strategy is not for the faint of heart.  Some people think it sounds scary.  Some people won’t get into anything with a variable rate loan, period.  You need to make sure you understand what all of this means, what the implications are if the rate increases, and it will, and then decide if you can tolerate this approach.  Weigh your perception of the risk against the increase in cash flow you’ll enjoy, and then make a decision based on fact.  I’ve done this in appreciating and non-appreciating markets and I personally love the strategy.  My rents increase every year, so I feel any increases in my payment due to the rate changing will be covered. 

Finally, you’ll need a good mortgage broker in order to pull this off.  You may need to weed through a couple before you find someone who’s “in tune” with the program here.  That’s normal.  If your broker isn’t familiar with this approach, don’t take it to mean that it can’t be done.  Take that as a sign to move on and find someone else!