With mortgage rates at historic lows, it might seem like everyone is refinancing their home loan. However, as an investor, you may be wondering how to tell if it makes sense for you to refinance a loan on an investment property. Here's a guide on the subject. We'll go over what it means to refinance, when it makes sense to take out a new loan, and how refinancing can help you save money. Use this information to help you figure out whether refinancing is right for you.
What does it mean to refinance?
Put simply, when you refinance, you take out a new loan and use its proceeds to pay off your current loan. Refinancing is usually done to secure a lower monthly payment. However, it can also be done to change the terms of the loan to make them work better for the borrower.
As a real estate investor, you'll most often deal with refinancing in the context of a mortgage loan. You can also refinance an auto loan, any student loans, or even a personal loan you may have taken out to consolidate credit card debt or to finance another big expense.
How can refinancing help you save money?
As noted, refinancing can help you save money by giving you a lower monthly payment. Typically, this is done by replacing your existing mortgage with a new one with a lower interest rate. Less interest will accrue over the course of the month, resulting in a lower payment.
Beyond just lowering the interest rate, there are other things you can do to lower your monthly mortgage payment. For instance, if your existing loan has a private mortgage insurance requirement but you've been able to build up more equity in the property since you took out your original mortgage, you may be able to secure a new loan without the same requirement.
Additionally, it's also possible to lower your monthly payment by spreading out your existing loan balance over a longer loan term. In this instance, since your current loan balance is less than it was when you first took out the loan, your monthly payment will also be less when your current balance is spread out across a longer time frame.
Lowering your monthly payment: A practical example
First, let's look at how securing a lower interest rate can help you lower your total payment on your refinance loan. Let's say you currently have a $250,000 loan balance that's accruing interest at a rate of 4% over a 30-year loan term. Based on those numbers, your monthly payment on your existing mortgage should be about $1,194 per month.
However, let's say that in the current interest rate environment, you were able to secure a refinance loan with an interest rate of just 3%. Using the same figures, your new payment would be about $1,054, a savings of about $140 per month.