Since interest rates are hitting record lows amid the pandemic, many investors are wondering whether they should refinance their investment properties. We've created a guide on how to refinance investment property. Read it over so you have a deeper understanding of how this process works from start to finish.
Why should I refinance my mortgage?
Before you can think about how to refinance your mortgage, consider why you want to refinance in the first place. There are typically three main reasons why someone might want to refinance their mortgage loan. We've listed them below in order to give you a better idea of why you might consider talking to a lender about doing a refi.
To increase your cash flow
As an investor, you probably know having positive cash flow is incredibly important. One of the main reasons why investment property owners ultimately decide to refinance is to get more cash flow out of the property. Put simply, if you have the ability to refinance into a new loan with a lower interest rate, you can lower your monthly mortgage payment and increase the amount of rental income the property generates each month.
To change the terms of your investment property loan
Another reason why you may want to refinance your current mortgage is to change the loan term. Maybe you want to move from a 30-year mortgage term to a 15-year mortgage term. Alternatively, maybe you have an adjustable rate mortgage now, and you want this stability and predictability of fixed payments. Maybe you've paid down your loan balance and want to get rid of your mortgage insurance requirement. Whatever the reason, taking out a new loan allows you to select the terms that will work best for you.
To leverage the equity in the property
Finally, with cash out refinancing, you can borrow against the equity in your property to finance a big expense. With a cash out refinance, you borrow more money than you owe on the property and receive the difference, so you can leverage the equity you build up in the property to fund other ventures like buying another investment property or doing major renovations.
When should I refinance my home or investment property?
Keep in mind refinancing doesn't always make sense. But if you've been thinking of refinancing your current mortgage on a rental property, here are some signs it may make sense to do so.
When you can significantly reduce your interest rate
First and foremost, investment property refinancing typically only makes sense if you have the chance to secure a significantly lower interest rate. Luckily, investment property refinance rates are currently at record lows, so there's a good chance you could stand to save.
However, in general, try to lower your interest rate by at least a full point when you refinance rental property. Otherwise, it may not be worth paying the closing costs to take out a new loan.
When your financial situation has changed
People also tend to refinance when their financial situation has changed significantly. For example, if you're a much more qualified borrower now than when you first took out your loan, you'll likely qualify for a much better investment property mortgage rate. Similarly. if you make more money than before, it may even make sense to shorten your loan term so you can save on the total amount of interest you're paying overall.
On the flip side, if your current monthly payment is too much for you to handle because you've taken on more debt or your income level has changed, you could also consider refinancing into a new loan that allows you to pay off your current loan balance over a longer amount of time. But be aware: If the lender perceives you as a riskier borrower, you may get a higher interest rate.
When you need to finance a big expense
Again, with a cash out refi, you can pull equity out of your home to finance a big expense. Before you do so, research your financing options. You can also look into what rate you'd get on a home equity loan or home equity line of credit (HELOC) before deciding whether it makes sense to refinance your existing rental property loan.