Have you been thinking about refinancing your rental property? If so, you’re not alone. Refinancing continues to remain popular with homeowners and real estate investors as a vehicle for locking in interest rates rather than chancing escalating rates under a variable mortgage, or unlocking the appreciated value of a property through a so-called cash re-fi structure.
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Whether you are a current or aspiring real estate investor, chances are high that one of the criteria you use to evaluate opportunities is ROI or return on investment. One way to increase the ROI of a real estate investment is to refinance the property at a lower interest rate, at a higher leverage rate, or both. This guide will get you thinking through the questions and answers needed to make the best decision for your portfolio. Let’s read on to learn more!
WHAT DOES IT MEAN TO REFINANCE A RENTAL PROPERTY, AND WHY SHOULD YOU CONSIDER DOING IT NOW?
Refinancing a rental property refers to taking out a new loan to replace an existing loan. There are many reasons why you might want to refinance your rental property, but some common reasons include:
· To obtain a lower interest rate and thereby save money on your monthly mortgage payments.
· To tap into the equity you’ve built up in the property by obtaining a mortgage that reflects the higher value of the property.
· To switch from an adjustable-rate mortgage to a fixed-rate mortgage.
· To shorten the loan term and build equity more quickly.
In general, it’s a good idea to refinance if you can get a lower interest rate and/or reduce your monthly payments. Tapping into the equity value of the property through a cash re-fi can also be a great way to put the stored value of these funds to use. As for why you would specifically pursue refinancing in 2022, there are a few reasons:
· Even with 30-year mortgage rates currently sitting at a relatively lofty 5.75% – 6% rate, a nearly three-point jump from July 2021’s rate of 2.8%, mortgage rates are forecasted to trend even higher in the next few years. As such, trading in a variable rate mortgage now for a fixed rate loan allows you to avoid the risk and cost of continued inflation and higher rates.
· The housing market is expected to cool off in the next few years, so refinancing now could help you tap into equity while today’s housing prices, while they’re still high.
· The government is expected to implement changes to the tax code that could make refinancing less beneficial. Refinancing before those changes go into effect may help you save money.
Refinancing can be a complex process. When considering strategies that could impact your taxes, meet with your accountant first. Likewise, be sure to speak with your financial advisor to ensure that your specific financial position is considered in your strategy.
THE BENEFITS OF REFINANCING A RENTAL PROPERTY
There are several benefits to refinancing a rental property.
· Perhaps the most obvious is that it can help to lower your mortgage payments. If you have been searching for ways to lower expenses, refinancing may give you the financial breathing room you need.
· If a cash re-if is done, the funds obtained from the refinancing can be used to increase the value of your property. By taking out the proceeds from the loan and making improvements to your rental property, you can make the property more attractive to potential tenants, increasing retention and the rental amount.
· Finally, refinancing can allow you to tap into the equity you’ve built up. This can be helpful in finding a growth strategy.
In short, there are several advantages that accrue from refinancing a rental property.
IMPORTANT CONSIDERATIONS TO BEAR IN MIND WHEN REFINANCING YOUR RENTAL PROPERTY
Before taking the plunge into the refinancing market, there are a few things to keep in mind to get you started on your journey:
· First, make sure you compare rates from multiple lenders to get the best deal.
· Second, beware of prepayment penalties, which can cost you hundreds or even thousands of dollars if you try to refinance before your loan term is up.
· Finally, remember that closing costs can add up, so be sure to factor them into your refinancing decision.
If you keep these things in mind, refinancing your property can be a great way to save money and make improvements.
THE PROCESS OF REFINANCING A RENTAL PROPERTY
The refinancing process can be a bit complicated, but it essentially boils down to these steps:
· Shop around for the best rates and terms.
· Gather all the necessary documentation.
· Apply for the new loan
· Wait for approval and close on the loan.
· Use the funds from the new loan to pay off the old one.
HOW TO FIND THE BEST REFINANCING DEALS
No one likes overpaying for anything, least of all when it comes to making expenditures on an investment that is meant to pay you money. If you’re looking to refinance your rental property, there are a few things you can do to make sure you get the best possible deal:
· First, talk to multiple lenders and compare their offers. Pay attention to both the interest rate and any fees or points so that you can do an item-by-item comparison across lenders.
· Second, don’t be afraid to negotiate. Let each lender know that you’re talking with others. If you find a lender who’s willing to give you a lower interest rate, press a little further and ask if they’ll also waive fees and/or points.
· Finally, make sure you understand all the terms of the loan before you sign anything. Be sure to read the fine print carefully and ask questions if anything is unclear.
SUMMING IT UP
Refinancing a rental property in 2022 can be a great way to get some extra money and improve your financial situation. Keep in mind, however, that there are some things to watch out for when refinancing. Make sure you do your research and compare different offers before signing any paperwork.
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