Refinancing

Refinancing swaps the current loan for a new one, and owners usually do it to cut the rate, change the term or take equity out as cash. A rate-and-term refinance that lowers the payment raises cash flow directly, and with it the cash on cash return on the same invested cash.

If the default $375,000 loan could be refinanced from 7.25% to 6.25% over 30 years, annual debt service would fall from $30,698 to about $27,707. Cash flow would rise to about $12,500, and cash on cash from 6.3% to about 8.3%, before counting the cost of the refinance.

Those costs go in the denominator. A refinance that costs $6,000 in fees raises cash invested to $156,000. Dividing the fees by the annual payment savings gives a break-even period, and the refinance only pays off if you hold the property longer than that.

Further reading: Refinancing on Wikipedia.