In the U.S., many property investors take out mortgages to purchase rental properties. If you’re one of them and you’re wondering if there’s any way to reduce your interest rate, you’re in the right place. In this article, we’ll share with you how to improve your rental income through refinancing.
What is refinancing?
Refinancing is the process of paying off your current loan by taking out a new loan. Property investors prefer to refinance their properties as new loans tend to come with better rates or terms.
Pros of Refinancing
- Refinancing reduces your payments. If you refinance into a loan that has a lower interest rate, that translates to significant savings. This is especially true if you’re taking out a large loan.
- You may be able to extend the repayment terms. This, however, means that you’ll probably pay more in terms of interest. Fortunately, refinancing also lets you shorten the repayment schedule. For example, you can refinance a 30-year loan into a 15-year loan. The benefit to this is the low interest rate.
- You can escape balloon loans. If you’re on a balloon loan where you’re required to pay a substantially large payment by a specific date but you don’t have the money, refinancing could get you the funds to pay off your loan.
Cons of Refinancing
- Refinancing can be expensive. Rates depend on the lender and the state, but generally, they’re anywhere between 2 to 6 percent of the outstanding principal. This includes the costs for inspections, appraisal, origination, and so on.
- You could end up paying more. If you refinance into a loan with a stretched-out repayment schedule, you could end up paying more due to the high interest rate.
- You may lose certain features on your current loan. For example, if you’re currently on a federal student loan, you’ll lose the privilege of reprieve.
Should you refinance your investment property?
Is refinancing the right thing to do? If you’re wondering if you should refinance your investment property, there’s one calculation you can do to help you decide. A break-even calculation can help you determine how long it will take you to recoup the costs of refinancing your single-family home.
If you’re buried in debt, you might want to wait until your credit score has improved. If you refinance while your credit score is low, you’ll likely end up with a significantly higher interest rate.
You could also look into cash-out refinancing. It’s a type of refinancing where you take out a mortgage that’s more than what you owe on your existing mortgage. With cash-out refinancing, you’ll receive cash that’s based on the amount that you owe on your current mortgage.
For example, if you have a $200,000 home and you’ve paid off $100,000, that means you have $100,000 in equity. Cash-out refinancing lets you convert part of your equity into cash. If you want to convert $20,000 of the $100,000 into cash, the $20,000 will be added to the principal when you refinance. Hence, the principal on your new loan would be $120,000. You’ll receive $20,000 in cash which you can use however you’d like, such as for repairs and renovations.
Still not sure if you should refinance your investment property? Don’t worry, you can always speak to a property management company.
How can you refinance a mortgage on your investment property?
If your property manager is confident that refinancing is the right option for your South Florida investment property, here’s what you need to do next:
#1 Get Your Paperwork in Order
Refinancing your investment property follows a similar process as when you took out your “old” mortgage. Your lender will require plenty of paperwork from you, such as:
- Your tax returns and Form W-2s for the last two years. If you’re a full-time investor, you might not be required to present Form W-2.
- Your recent pay stubs or rent receipts. Your lender needs these to determine your debt-to-income ratio. If you don’t have a full-time job, you don’t need to provide your recent pay stubs.
- Bank accounts for savings, checking, and business. These show how much money you have for closing costs and other expenses.
- Homeowners insurance. This is a standard requirement for all mortgage lenders. If you don’t have homeowners insurance, it’s time to think about getting one.
#2 Shop Around for the Best Mortgage Lender
Refinance rates vary by lender and by state, so it’s best to shop around and compare quotes from at least three lenders. If possible, ask for the same information from each mortgage lender. This helps you make an accurate comparison of your prospects. If you’ve hired a property management company, ask them for mortgage lenders that they can recommend.
#3 Apply for a Refinance Loan
Once you’ve decided on a lender, it’s time to apply for a refinance loan. You’ll have to complete your chosen lender’s application process, which involves providing proof of your income, finances, etc. You’ll likely fill out the application form in front of the lender, as the process involves answering questions about your finances. If possible, clear your schedule for an hour or two for this part of the refinancing process.
After you’ve filled out the application, your lender will forward your file to their underwriter. The underwriter will review your application for red flags, such as a low credit score or low savings account. During this stage, they will also conduct an appraisal of your property.
#4 Close on Your New Mortgage
If the underwriter approves your application, the final step is to close on your new loan. You’ll have to sit down with your lender and sign your documents and pay any closing costs. Closing costs are usually around $5,000 but this depends on the details of your loan. Once that is over, you’re good to go!
Is refinancing right for you?
Refinancing your South Florida investment property is an excellent way to lower your interest rate and extend your loan terms. However, it’s important to note that it’s not for everyone. Although it can enhance your rental income, refinancing at the wrong time and with the wrong lender can do more harm than good.
If you’re considering refinancing your rental property, consult Luxury Property Care’s investment advisers first. We can help you achieve your financial goals without putting your finances at risk. Call us at (561) 944 – 2992 or complete our contact form to learn more.