In real estate, there is a little known, but highly effective, way to create large wealth using leverage. The method is knows as No-Seasoned Refinance.
To understand this concept, we will need to break the information down into two parts:
You should, by now, know what a refinance is. This is the process of paying off an old loan for a more favorable interest rate or paying off an old loan to get additional cash out of a transaction. Here are a couple of examples of the two types of refinances:
- You currently own a home on which you are paying 6.5% interest rate. You recently find out that current interest rates are around 4%. You then talk to a bank and refinance, paying off the old loan with 6.5% for a new loan with an interest rate of 4%.
- You own a home, which you owe $100,000. That home has a value of $150,000. In this home you have $50,000 in equity. You decide to put some of that equity to use and build a new deck for the home. You go to a bank and refinance, paying off the old loan of $100,000 and replacing it with a new loan for $120,000. The additional $20,000 is paid out as cash.
Seasoning is a common term in the mortgage and financing industry. Simply said, it is the period of time that you own a home. For example, if you own a home for 12 months and have made 12 payments, it is said that you have 12 months of seasoning. If you have owned a home for 6 months and made 6 months of payments, you will have 6 months of seasoning. However, when you have a home that you have owned for less than 2-3 months, banks commonly reference this as “no-seasoning.”
The idea of a no-seasoned refinance is to purchase a home using financing, such as hard money financing, or your own cash, then quickly refinance pulling the cash out and either repaying yourself, if you used your own cash, or paying off the other financing. Once the money is free, you can use the financing or your own cash to purchase another property and continue the process.