Interest rates are at record lows, which means that most homeowners are considering refinancing in order to lower their monthly payment. However, when you invest in real estate, there are some extra components to consider beyond just how the interest rate that you're given will affect your cash flow on a regular basis.
With that in mind, below is your guide to investment property refinance rates. Armed with this knowledge, you should have a better idea of whether or not refinancing your investment property is the right option for you.
What are investment property refinance rates?
If you've been thinking about refinancing your rental property, the first thing that you want to check is current interest rates. As of the time of writing, a 30-year fixed rate mortgage has an average rate of 2.71% while a 15-year fixed rate mortgage has an average rate of 2.26%, according to Freddie Mac.
That said, it's important to note that even if you have an excellent credit score, you likely won't get the best rate available on your refinance loan. Unfortunately, mortgage lenders tend to view rental property mortgages as riskier than loans on primary residences.
Put simply, they believe that if you had to make a choice between paying your primary mortgage and paying the loan on your investment property, you would be more likely to default on the latter. With that in mind, as an investor, you should expect to be given a higher interest rate than the going market rate.
Refinance rates: A practical example
Let's say, for example, your home is worth $300,000. If you have a current loan balance of $189,000 and a current interest rate of 4.5% on a 30-year fixed rate mortgage, your current monthly payment would be about $1,240. If you got a new 30-year, fixed rate loan at an interest rate of 3.5%, your monthly payment could be as low as $1,132. That's a savings of $108 per month.
What are the pros and cons of refinancing an investment property loan?
Still, even at a higher interest rate, refinancing can have big benefits. To that end, we've listed some pros and cons of refinancing below.
At its core, refinancing into a loan program with a lower interest rate gives you a chance to lower your monthly mortgage payment, which would increase the total amount of rental income that you receive from the property.
However, beyond that, refinancing gives you the ability to change your loan terms. For example, you could switch from an adjustable-rate mortgage into a fixed-rate option in order to give your payments more stability. On the other hand, if your loan has a mortgage insurance requirement, but you build up more equity in the home over time, you may be able to get rid of that requirement by refinancing.
Finally, if you choose to do a cash-out refinance, you will have the ability to leverage your home equity to find other costs, such as adding another property to your portfolio or paying for improvements to the property.
As an investor, the biggest downside to refinancing is that it does come with a few fees. Similarly to when you first took out the mortgage on the property, you'll be expected to pay closing costs in order to take out your new loan. Given that, if you're thinking of refinancing, it's crucial that you find your break-even point to get a better sense of whether or not refinancing is a smart financial move.