Refinancing your investment property can be a smart move if you’re an investor looking to lower your monthly payments and potentially see higher monthly returns. However, there are several factors to consider before getting a new mortgage loan. Today, we’re discussing what it means to refinance, how to refinance your rental property, and some of the pros and cons to consider.
Contents of This Article:
- What Does It Mean to Refinance a Property?
- Why Would You Refinance Your Rental Property?
- How to Refinance Your Rental Property
- Should You Refinance Your Rental Property?
- Trust the Professionals With Your Rental Management
What Does It Mean to Refinance a Property?
Refinancing your rental property involves replacing your current mortgage with a new loan. When you refinance, the new mortgage pays off the balance of the old one, and you start making payments on the new loan under new terms.
Generally, the goal is to achieve better loan terms, access any equity you have in the property, and potentially see higher rental returns. Landlords and property managers in Baltimore know that a profitable rental property is a successful one.
There are many different types of refinancing to consider, depending on your goals and financial situation. Here are the main mortgage refinance options you can choose between.
- Rate-and-Term Refinance– Rate-and-term is the most common type of mortgage refinancing. With this option, you can replace your existing mortgage with a new one that has a different rate, loan term, or both.
- Cash-Out Refinance- A cash-out refinancing option allows you to borrow more than your existing mortgage balance and use the extra funds to access your home’s equity. Generally, you can use this money for things like home improvements or debt repayment.
- Cash-In Refinance- Cash-in refinancing allows you to pay a large amount to lower your mortgage balance, then refinance to a new mortgage at a different interest rate, term, or both.
Why Would You Refinance Your Rental Property?
There are plenty of reasons why you may want to refinance your rental property. Whether you want to get a lower interest rate or tap into your home equity to make renovations, it’s important to know your options. Here are some of the main reasons investors refinance their properties.
- Lower Your Interest Rate
- Alter Your Mortgage Term
- See Higher Returns
- Get Rid of Private Mortgage Insurance (PMI)
- Consolidate Debt
- Use Your Home Equity
Lower Your Interest Rate
Who doesn’t want to save money? Refinancing your rental property can lower your interest rate, which in turn reduces your monthly mortgage payment. You can save thousands of dollars over your loan term with a lower interest rate.
Alter Your Mortgage Term
Refinancing also allows you to change the length of your mortgage loan term. For instance, instead of a 30-year mortgage, you can refinance to a 15-year loan term and save money on interest over time.
See Higher Returns
When you lower your interest rate or extend the terms of your loan (or both), you can lower your monthly payment. In turn, you could potentially see higher monthly profits from your rental property.
Get Rid of Private Mortgage Insurance (PMI)
If you have a conventional mortgage loan and made less than a 20% down payment, you’re likely paying private mortgage insurance (PMI). However, if you have enough equity, you can eliminate this monthly fee by refinancing your loan.
Consolidate Debt
If you have equity in your home, you can use the cash from refinancing to pay off other debt. For instance, if you have credit card debt, student loan debt, or other loans with high interest rates, you can consolidate this debt into your mortgage, usually with a lower interest rate.
Use Your Home Equity
Your home equity is the value of your home minus what you owe on your mortgage. That said, if your property has appreciated in value, or you’ve already paid off a good portion, you can use the equity for other things, like renovations, paying off other debt, or buying additional investment properties.
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How to Refinance Your Rental Property
If you’re considering refinancing the mortgage on your rental property, here are some of the steps you’ll need to take.
- Check Your Equity– Check to see how much equity you have in your property, as most lenders require at least 20% for refinancing, especially for investment properties.
- Compare Rates and Lenders– Shop around to find the best interest rates and terms. Don’t forget to compare fees, loan terms, and potential savings.
- Gather Your Documentation– You’ll need to provide paperwork like tax returns, income statements, property details, and current mortgage information.
- Submit Your Application- Once you’ve chosen a lender, submit your application along with the required paperwork and await approval. You may also need an appraisal.
- Close On Your New Mortgage Loan- After approval, you’ll review and sign the closing documents and pay closing costs, and your new loan will pay off your old mortgage. The refinancing process is complete!
Should You Refinance Your Rental Property?
Refinancing your rental property can be a smart financial move. However, it’s not right for everyone. It’s important to evaluate the pros and cons before making any changes to your rental property mortgage.
Benefits of Refinancing a Rental Property
- Get a lower interest rate
- Lower your mortgage payment
- Use your home’s equity to take out cash
- Decrease your loan term
- Consolidate debt to help pay other loans
- Switch from an adjustable-rate mortgage to a fixed-rate
- Cancel PMI and avoid extra fees
Disadvantages of Refinancing a Rental Property
- Paying closing costs
- Longer loan terms adding more costs
- Less equity in your home if you take cash out
- Rates could drop after you close
- Credit scores may decrease
- It can be a lengthy process
Whether or not you should refinance your mortgage depends on several factors. For instance, if you still have quite a bit to pay off and interest rates have dropped, it may be a good time to refinance. However, if you’ve paid off a good chunk of the loan already, it may not make sense to refinance. Ultimately, you have to look at your personal situation and decide what makes the most sense for you and what’s going to save you the most money.
Trust the Professionals With Your Rental Management
Deciding whether or not to refinance your rental property takes careful consideration. After all, saving money and making the most rental returns is the goal for most investors. So, weigh the pros and cons and decide for yourself!
Another way investors can save money and make higher returns is by hiring professional rental management. Companies like Bay Property Management Group help find high-quality tenants quickly and keep them happy, reducing tenant turnover and ensuring consistent returns. If you’re looking for a comprehensive management team to help with your rentals in Baltimore, Philadelphia, Northern Virginia, or Washington, DC, contact BMG today!
