Refinancing property is not limited to primary residences. As a rental property owner, you can also enjoy the great benefits of refinancing property such as getting low-interest rates and shortening the length of a mortgage.
If done in the right way and with the right purpose, refinancing a property can be an incredible move. Unfortunately, not too many property owners are familiar with rental property refinancing. This means if they have high-interest loans, they’re barely getting any rental income as the loan could be limiting their income profits.
If you’ve never considered refinancing your rental property, here’s what you should know about refinancing a rental property in 2020.
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What Does Refinancing a Rental Property Entail
Refinancing is the process through which a property owner gets a second mortgage on a property to pay off the initial mortgage they took. This is done in a bid to reduce interest rates, monthly payments, or change mortgage financiers.
Refinancing a rental property is a bit different from refinancing a primary residence. For lenders, refinancing a rental property means taking on a high risk since property owners are likely to default more on a rental property than their primary residence if they find themselves struggling financially. This means higher interest rates and stricter terms than a mortgage on a primary home.
When You Should Refinance a Rental Property
The most common reason property owners seek refinancing is to reduce their interest rates. If you have a higher interest rate, you can refinance for a lower rate.
For instance, if you took a mortgage of $300,000 with a 6% interest rate for 30 years, the monthly payments would be around $1,800. This means you’d have to pay nearly $350,000 in interest. However, if you refinanced for an interest rate of 5%, monthly payments would be $1,600 and you’d pay $280,000. That’s a difference of nearly $70,000 from a single percentage point.
Other reasons property owners choose to refinance is so they may increase or decrease the repayment term or buy investment property with cash then refinance so they may buy more property.
What Is Required for Successful Refinancing
To refinance a rental property, lenders will ask you to build more equity as compared to a traditional mortgage because lenders know property owners are not likely to default on their home mortgage as compared to their investment property loans. Therefore, lenders will require you to have at least 25% equity so they may refinance 75%.
A lower interest rate could be the purpose behind seeking refinancing but it’s never a guarantee. The interest rate you acquire depends on the market as well as your income and credit score. Make sure you have good credit to get a low-interest rate. Your debt to income ratio will also be factored in since lenders will want to make sure you’re not taking on too much debt.
Some of the documents the lender will require include your proof of income, proof of homeowners insurance, your W-2 forms, and financial statements to show the assets you have.
You Can Buy Investment Property With Cash Then Refinance
Some property owners refinance not to lower the interest rate but to cash out on the property then refinance to either buy more property or do renovations.
Despite the potential benefits a property owner may enjoy from refinancing their property, refinancing comes with a certain degree of risk. It is, therefore, critical that property owners fully understand both their reasons for refinancing as well as the risks against the rewards.