The refinancing of rental properties has become synonymous with several compelling advantages. At the very least, it can open up a variety of wealth creation opportunities, including the ability to lower interest rates and monthly payments, improve loan terms, and generate additional cash flow. Yet far too few new investors even know that this strategy exists. For one reason or another, there is a whole contingent of investors who are unaware of the opportunity they are missing out on.
Despite the many reasons one may have for refinancing rental real estate, the process should not be taken lightly. Let's be clear: refinancing rental properties involves a certain amount of risk. Therefore, it is crucial for investors not only to be aware of the purpose of the refinancing, but also to weigh the risks against the benefits. Done right and for the right reasons, refinancing a rental property can be a good move. Learn more about why investors should refinance a rental property in their own portfolio here.
When should I refinance my rental property??
The best time to refinance your rental property is when the value of the property is high and interest rates are low. The most common reasons for refinancing are:
Mortgage rate cut
Faster repayment of the loan
Acquisition of new investment property
Upgrading an existing investment property
So now is a good time to consider refinancing a rental property. A lot has changed in a relatively short period of time. Most importantly, those who bought their property before the recession will find that today's interest rates are much lower than when they originally bought it. In fact, the financial industry is heavily weighted toward borrowers and refinancers right now. Interest rates have risen, but are still historically low. Today's interest rates look much better than they did a few decades ago. In the meantime, interest rates will continue to rise as the economy recovers. The sooner you decide to refinance, the better.
Advantages of refinancing rental real estate
There are countless reasons to refinance investment property, but the best reason is always the one that promotes your own exit strategy. Each of the following benefits is a good reason to refinance rental housing:
Rental housing refinancing may allow some investors to switch from a variable interest rate to a fixed rate.
Refinancing a rental property at the right time can easily lower the amount of interest investors owe over the life of the loan.
By lowering the amount investors owe over the life of a loan, they can also lower their monthly obligations.
Refinancing a rental property can help investors change the length of the loan they are locked into.
If the investors have an acceptable loan-to-value ratio, the lender can deduct the cost of private mortgage insurance from the monthly payments.
In a cash-out refinance, investors can take out a loan on their home.
Convert variable interest rate into fixed interest rate
One of the most important reasons for refinancing your rental property is to convert a variable interest rate (also called floating rate) into a fixed interest rate. Why this is important? While an adjustable interest rate may result in lower payments on your home in the short term, it can be a nightmare should interest rates rise in the long term. Locking in a low fixed rate, on the other hand, can protect investors from the threat of interest rate increases. A fixed interest rate means that mortgage payments remain the same over the life of the loan, regardless of how high or low the market is.
Lower interest rate
Another consideration when refinancing their rental property is the ability to lower their interest rate. The average interest rate on a 30-year fixed-rate mortgage was 3.46 percent in september, according to freddie mac, down from 3.89 percent a year earlier. Those who purchased their investment property at a higher interest rate can potentially save thousands of dollars by refinancing over the life of the loan.
Reduce monthly rate
By lowering the interest rate, investors can also lower their monthly mortgage payments. For a rental property, this can result in additional cash flow that can be saved or invested in other investments.
Adjusting the loan term
Another reason many investors choose to refinance their rental property is to adjust the term of their loan. For investors with a 15-year interest rate, the opportunity to move to a 30-year interest rate can offer subtle but significant benefits to their business. It should be noted, however, that the term of the loan will affect monthly payments.
Remove PMI
Another reason for refinancing an investment property may be the elimination of private mortgage insurance (PMI). This common policy is required by lenders when borrowers make less than 20 percent of a down payment or when the loan-to-value (LTV) ratio is more than 80 percent. The purpose of the PMI is to protect lenders from the risk that buyers will default on their mortgages. However, these additional expenses can add up to significant costs for borrowers in the long run.
Taking out cash
Another motivation for refinancing your rental property is to take cash (equity) out of your home. With cash-out refinancing, investors have the opportunity to go beyond what they own on their current mortgage, putting cash in their pocket that they can use to make improvements to their current rental property or use on other investment properties.
How to refinance an investment property in 5 steps
If you know how to refinance a rental property, you probably already know how beneficial it can be under the right circumstances. However, there are still many people (even investors) who did not know that refinancing a rental property was an option; they had no idea that they could reduce their monthly payments by following a few simple steps.
If you qualify to refinance a rental property, here are some of the key steps you should consider:
Determine how much equity you have
Familiarize yourself with the mortgage rules
Before learning how to refinance a rental property, you must first take a look at the equity you have already built up in a related property. "Lenders typically require a cushion of 25 percent or more to refinance a loan secured by a non-owner occupied home," says stephen ladue, a senior loan officer at primelending in brookfield, wisconsin. In other words, lenders want to see that you are less likely to go into default. Those with more equity have more in hand and are therefore less at risk of defaulting on mortgage payments.
It should be noted that lenders do not necessarily consider the current rental rate to be reliable. That means you have to prove to the bank that your rental property will actually be profitable. As a rental property owner, it is in your best interest to demonstrate to the lender that rental income is reliable.
If you can prove that the rental income is reliable and you have sufficient equity, it is important to familiarize yourself with the rules of refinancing. Be sure to do your due diligence and research what you can and cannot do, as each lender has their own guidelines to follow. For example, some lenders do not allow owners with multiple properties to refinance.
"Technically, a borrower must intend to occupy the property and sign an affidavit to that effect at closing to qualify for a new owner-occupant loan," says bankrate's marcie geffner. "One year of residence" is often used as a guideline for determining the intention to use the property. But it's not an absolute rule," she says. As someone who wants to refinance their own rental apartment, you should make sure that you follow the appropriate occupancy rules.
Requirements for rental housing refinancing
The first step in refinancing your rental property is to be clear about the purpose of your plan. The second step is to check whether they are eligible for refinancing at all. Although each lender has its own qualification standards, the following provides a general overview of what you are looking for:
Must have a loan-to-value ratio of 75 percent or less (this ratio varies from lender to lender).
Borrowers must have a good payment history over the last 12 months for the current mortgage at the time of refinancing.
Credit score must be 660 or higher.
Financial documents: tax returns, credit report, proof of assets and debts, rental agreement and proof of rental income.
Interest rates for refinancing investment properties in 2020
It is important to note that lenders consider rental properties to be riskier investments than primary residences. At the very least, homeowners are more likely to default on their buy-and-hold investments than on their primary residences. As a result, interest rates for refinancing investment properties differ from those for primary residences, albeit only slightly. Although terms vary from lender to lender, most refinancing terms for rental properties will offer shorter terms and slightly higher interest rates. However, at this point in 2020, it looks like interest rates for refinancing 30-year rental properties have settled somewhere in the 2 to 3 percent range, which is still historically low, even though they are higher than those for traditional residential properties
Can I refinance my rental property under HARP?
It is entirely possible to refinance an investment property through the home affordable refinance program (HARP). However, there are still some criteria that need to be met. Specifically, the loan must meet the program's traditional eligibility criteria.
With HARP, you can refinance your rental property
The home affordable refinance program (HARP) is a government-backed program designed to help people without much equity in their homes refinance a more stable mortgage. HARP allows them to refinance investment property, as well as refinance if they owe more than their home is worth. This may be the case if the mortgage is underwater, d. H. If the loan to buy a property has a higher principal amount than the market value of the property. You may also be able to refinance a rental property through HARP if you do not meet the minimum loan-to-value required by most lenders.
To qualify for HARP, you must meet some requirements:
You must not have been 30 days or more late on any payment in the last 6 months.
You may have no more than one late payment in the last 12 months.
The property you want to refinance must be your primary residence, an investment property with 1-4 units, or a second home with 1 unit.
Your current loan-to-value ratio must be above 80%.
Your current mortgage must be owned by fannie mae or freddie mac.
Advantages of HARP
Those eligible for HARP can benefit from the program in several ways. First, you can refinance your investment property even if you owe a higher amount on your mortgage than the property is worth due to its decline in value.
This process is faster and easier than a conventional refinance because there is no underwriting process, no appraisal, and no minimum credit score requirement. HARP offers the opportunity for benefits such as:
Pay off your mortgage faster resulting in an increase in profit
Expressing interest in HARP to refinance a rental property? Visit fannie mae and freddie mac for participating lenders or contact your current lender and see if they participate.
HARP loan disadvantages
While HARP is a viable option for some, it does come with some of its disadvantages as well. Problems that arise with other loan modification programs are still present in HARP:
You must continue to pay mortgage insurance if you owe it
You cannot pay off or refinance a fixed-rate second loan or home equity loan
The terms of your loan can change from purchase money to hard money depending on your state laws
HARP alternatives
While HARP has a number of benefits, but there are also a number of requirements that many cannot meet. If you are not eligible for HARP, you can also refinance your rental property by:
A private lender
FHA streamline refinance program
Using a private lender can lower their interest rate and monthly loan costs, but they must also meet certain credit and loan-to-value requirements.
Another option is the FHA streamline refinance program. If they qualify, they can use this program to refinance their investment property, gaining similar benefits to the HARP program (d. H. Minimal paperwork and minimal underwriting). In addition, the maximum loan amount is set at one of two options. The maximum loan amount can be the original mortgage balance or the lesser of the current outstanding mortgage balance. If you are unable to pay the closing costs, you have the option of having them paid by your lender. If your lender will pay closing costs for you, you will receive a higher interest rate.
While both HARP and streamline refinancing are viable options for investment properties, you may need to continue paying off your current mortgage until you have built up enough equity for a conventional rental property refinance through a private lender.
Summary
Before you consider refinancing your rental property, you must determine your long-term goals for the property. For example, if you plan to sell the property in the next few years, refinancing with a thirty-year fixed-rate loan is probably not in your best interest. Depending on your specific qualifications, it may be worth considering alternative options such as HARP or the FHA streamline financing program. With interest rates low and more programs available, now is the time to consider whether or not refinancing is right for you. The decision to refinance investments in rental properties is an important one, take your time to find the best method for your needs.
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