The benefits of refinancing to investment property owners cannot be overemphasized A mortgage refinance enables you to reduce interest rates, redefine the loan terms, and finance new investments. Overall, refinancing your investment property enables you to cut costs and improve profitability.
Here, we’ll discuss investment property refinancing and the process generally.
In real estate, refinancing is the process of replacing an existing mortgage with a new one offering better terms to the borrower. Depending on your lender, you may have collected a loan with a high-interest rate or generally more unfavorable terms. If the rates on the market change and you want to take advantage of the better rates, you can refinance your mortgage to get a better deal.
Refinancing allows the borrower to customize the terms of the new deal by;
When it comes to refinancing investment properties, the process is largely similar to that involved in refinancing residential properties. However, it is somewhat different as it requires some extra documentation. Nonetheless, the refinancing process for investment properties is not difficult, and this piece will serve as a guide to help you get through the process much more easily.
There are several reasons you may want to refinance an investment property. Some of the benefits you may gain from refinancing an investment property include;
The most common reason for refinancing an investment property is to reduce the interest rate on the property. This is usually the case when you initially took a loan with a high-interest rate or obtained a mortgage at a time when rates were generally high. For example, between 2010 and 2021, the average interest rate for 30-year fixed-rate mortgages plummeted from 5% to 2.6%. It is interesting to know that these rates were even higher before 2018. Meanwhile, the average interest rate for 15-year fixed-rate mortgages reached a record low of 2.16% in 2021. If you took a loan in 2018 with the higher rates, refinancing in 2021 would have allowed you to enjoy the lower rates available as of then, helping you save a significant amount of money over the term of your loan.
Currently, the average 30-year fixed-rate mortgage rate is about 3.22%, while that for 15-year fixed-rate mortgages is about 3.01%. This shows that it may be better to refinance quicker rather than waiting for much lower rates.
Refinancing your loan allows you to change the terms of your loan to one that is most comfortable for you. If you previously had a long-term loan, you can negotiate a short-term loan to enable you to pay off your loans faster while saving on interest payments. Conversely, you can renegotiate a longer repayment period to help reduce your monthly payments and direct the extra monthly savings towards other ventures.
In the case where the equity value on your property is high, i.e., your property is worth more than your unsettled mortgage payments, you can take money out of that equity to pay for repairs and renovations in your house, to purchase a different residential or investment property, or for whatever purpose you deem fit.
This is known as cash-out refinancing and allows you to borrow against the equity you have built on the property. Cash-out refinancing is a simpler and better alternative to a home equity line of credit.
You can access more funds through refinancing to effect renovations on your property and improve its outlook on existing and new tenants. Thus, you can take advantage of this improved property quality to increase the rent on your property. Some common upgrades you can make to increase your rental income include;
Improving your space’s desirability fosters goodwill among your current tenants while increasing the market value of your home. This means you can charge higher rent in the short term and recoup your investment by selling the property for a higher price later.
Despite its many advantages, refinancing an investment property typically has more stringent requirements that may make it less worthwhile. These requirements include;
LTV, calculated as the amount of the mortgage divided by the appraised value of the property, tells you the amount of equity you have in the property. For example, if the property is valued at $100,000 and you have a mortgage payment of $80,000 left, the LTV is 80%. The higher the LTV, the higher the risk to the lenders, who, in turn, make up for this risk by offering higher interest rates.
With investment properties, the LTV requirements during refinancing are much stricter (about 75%) compared to the requirements for residential loans.
When you refinance a property, your payment schedule resets. That means any interest you have paid on your loan will become invalid, as you will have to restart the payment process from the beginning.
The closing costs on refinancing an investment property can be as high as 2%, with the amount running into thousands of dollars. This closing fee does not count towards your mortgage payment, and you typically have to pay out-of-pocket. This closing fee might be hard to come by and may impair your ability to break even.
Some lenders may require a credit score of 680 or higher if you’re refinancing a single investment property. However, if you’re refinancing a collection of investment properties, this requirement may go even higher, reaching up to 720, according to Fannie Mae guidelines.
Before you refinance, you must demonstrate that you can afford to make your rental property payments. One important factor that lenders consider is your debt-to-income ratio. This metric compares your monthly loan payment obligations to your total monthly income. Most investment properties require you to have a maximum DTI ratio of 45% before you can refinance.
Although refinancing an investment property has several pros, it is not a venture that you can rush into. There are many factors that you must consider to determine that refinancing is the right move for you at the time.
Before refinancing, you should weigh your current financial situation against the expected ROI on the property to determine that you’re making a sound financial decision. Refinancing your property should be able to help you achieve your financial goals without significantly breaking the bank in the short term. Thus, before refinancing, you must do extensive research on different loan companies and look up their fees, closing costs, and rates to determine if they align with your financial goals.
If you’re planning to refinance with a different lender from your current one, you have to consider if your current lender has a prepayment penalty and how the penalty will affect your situation overall. Another factor to consider is your current equity on the property. The more equity you have on a property, the more worthwhile refinancing can be. However, considering the immediate financial implication of refinancing, you must ensure that the refinanced rates and terms offer a significant advantage over your current terms. You should avoid refinancing for the sake of it. Ensure that you properly crunch the numbers to verify that you can break even on time.If you do not plan to own a property long-term, at least until the time you break even, there is no point in refinancing as you would only be incurring more costs than gaining benefits.
You have to be adequately prepared before starting the refinancing process. You should fully know your financial situation, ranging from your current credit and DTI to your current equity on the house. Ensure that you have crunched the numbers on the property to assure yourself of the potential to break even, and then you can begin the process.
Here is a typical breakdown of what the refinancing process looks like;
Although specifics may vary from lender to lender, there are certain requirements that are usually set in stone for refinancing investment properties across different lenders. As mentioned, these requirements are typically stricter for investment properties since the risk of foreclosure with investment properties is typically higher than for residential properties. Failure to meet these requirements significantly impairs your chances of getting a refinance.
The specific requirement for refinancing investment properties are as follows;
Planning to refinance, start one year ahead to get your finances in order so you can meet the stringent requirements.
You’ll need several financial documents to refinance your rental property. These documents are similar to those you used when applying for the loan and typically include;
You may be required to present an accounting of the rent you’ve collected from tenants when refinancing a rental property. This will enable you to leverage your income to help you qualify for a mortgage.
This is often recorded on IRS Form 1040, Schedule 3 on your tax return. However, if the property is leased through a company, you may be required to provide IRS Form 8825.
In some situations, you can utilize your present lease agreement to demonstrate to your lender the revenue generated by your rental property. This might occur if you’re refinancing a relatively new rental property or if you’ve been without renters for an extended length of time, such as during a renovation.
Gather the necessary documents before applying for refinancing to help expedite the process. Ensure that you keep multiple copies on hand if you need to resend any documents.
Once you have your finances and documentation in order, you should begin researching various companies so that you can get the best deal, unless you want to refinance with your current lender. However, you’re usually more likely to get a better deal with a different lender.
Check through the rates, qualifying requirements, and terms offered by each lender while also reading the reviews from other customers. You should compare at least three lenders, but you can do as many as 10. Comparing these various lenders can save you a significant amount of money.
Looking for the best company to refinance your loan, then look no further than Aurum & Sharpe. With us, you get the best rates and terms, and we help you save as much money as possible.
Once you have determined who your preferred lender is, you should immediately proceed to apply for refinancing with them. Fill out the lender’s application form and submit all necessary documents to support your application. Ensure that you make yourself available to answer any questions that may come up following your application.
When your lender accepts your application, you should be able to lock in your interest rate. This allows you to peruse your refinancing terms without being concerned about increasing interest rates. Depending on your lender, rate locks might last anywhere from 15 to 60 days. Your location and loan type may also affect the length of your rate lock.
If you like the rate you receive, lock it in as soon as possible with your lender. If not, you can “float” your interest rate and continue with the loan. If you float, consider that your rate may rise or fall based on market rates.
After you lock in your rate, your lender will begin the underwriting process. During underwriting, your lender examines your income, assets, and the property’s condition. Like when you bought the house, the lender will also demand an appraisal. An appraisal assesses a house’s market value and demonstrates to your lender that the amount you’ve agreed to pay for it is fair.
The final stage in the refinancing procedure is to close the agreement. Fortunately, refinance closings are faster than property acquisitions. Your lender will schedule a closing appointment with you and give you a document known as the Closing Disclosure at least three days before the scheduled closing date.
Your Closing Disclosure describes the terms of your new loan as well as any closing expenses or fees you must pay. At the closing, you’ll sign all of your paperwork and ask any final questions you have regarding your loan. If your lender owes you money, such as during a cash-out refinancing, you’ll see it in your bank account within a few days. When you refinance, you will typically have to pay closing costs of up to $5000.
Refinancing an investment property has many benefits and could save you thousands of dollars. While the process is very similar to that for refinancing a residential property, the requirements are often more stringent, and you often have to work harder to meet these requirements. One thing to note is that despite its advantages, refinancing is not always profitable, and you may often lose in the process. Hence, it is necessary that you do the maths properly before beginning the refinancing process. Most importantly, research different lenders and settle for one that puts you first and offers you the best rates and terms. Looking to refinance your current residential or investment mortgage? Look no further than Aurum & Sharpe. We put you first and ensure that you get the best rates possible. So pick up your phone now and contact us at 516-241-8276 to book an appointment today, or use the online form to get in touch.
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