Understanding mortgage refinance rates

Obtaining the best refinancing rates has many benefits for investors. But did you know that you can take advantage of refinancing to save money as a rental property owner? This article will cover the basics of refinancing a rental property, including what interest rates you can expect to qualify for.

Reasons to refinance a rental property

Investors look for lower refinance rates for different reasons. As a rental property owner, it can be a great way to lower your monthly costs and increase your cash flow. Here is what refinancing a commercial property mortgage can do for you:

• Lower interest rate and monthly payment: Perhaps you purchased the property when interest rates were much higher. Refinancing now while rates are low could save you valuable funds each month to put towards other financial goals such as renovations, repairs, or other investment projects.
• Change loan type: Depending on your financial situation, you may be interested in extending or shortening the loan term. By shortening the loan term, you save money on the overall interest you pay, and by extending the loan term, you can lower your current monthly mortgage payment to free up cash now.
• Cash-out on equity: Cashing out on the home’s equity is a great way to access funds to achieve financial goals. Maybe another business opportunity presents itself, or emergency repairs need to be made on the property.

Rental properties and better refinance rates

The bottom line: Interest rates for rental properties will typically be at least 0.50% to 0.75% higher than the rate on your primary mortgage.

If you found yourself in a troubling financial situation where you could only afford to pay the mortgage on your investment or your rental property, you are more likely to pay the former. Lenders know this. Because rental property loans are, by nature, riskier than owner-occupied loans, they need to take extra precautions for themselves.

Requirements for refinancing a rental property

While the process to obtain lower refinance rates for a rental or investment property is similar to refinancing a primary residence, there are a few differences you’ll need to prepare for. Here are a few requirements you will see with most lenders to refinance a rental property.

• High equity: The more equity you own, the better, and most lenders will want to see that you own at least 20% on your rental property.
• Lower DTI: The higher your debt-to-income ratio, the more of a risk you are. Before beginning the refinance process, do what you can to pay down debts and improve this ratio.
• High credit score: A higher credit score means better loan terms. This shows the lender you are a trustworthy borrower who pays their bills on time.
• Cash reserves: Homes are a significant and ongoing expense to take on. They require repairs and constant maintenance. For this reason, many lenders require 6-month cash reserves for each rental property.

How to refinance rental property

As with any refinance, the more prepared you are, the smoother the process will be. Here is what you can expect with your rental property refinance.

1. Organize your documents

You will be required to submit various documents. Your lender will need to confirm the income you receive from rental payments and assess your overall financial situation.

• Pay stubs and W2s
• Tax returns
• Bank statements
• Current lease agreements

2. Apply and lock interest rate

You will need to submit an application, along with the requested documentation, to get the refinance process started. Once you have been approved, you will lock in your interest rate. These interest rate locks may last between 15 and 60 days, depending on the lender.

3. Wait for underwriting

During the underwriting process, your lender will review your financial standing. They may reach out for clarifications or explanations on the documents you submitted to them. Be sure to answer all requests promptly. This will help everyone stay on track to get you to the closing table. They will also review the results of the home’s appraisal to ensure the loan is on par with the market value.

The title company will conduct a search to determine if there are any title issues. This could mean uncovering liens or claims on the property that will need to be sorted before closing. If you purchased an owner’s policy, you can receive a reissue rate and save on closing costs.

4. Close!

Three days before the official close date, your lender will send you a “Closing Disclosure.” This document covers all expenses and information related to the refinance, including closing costs, taxes, appraisal fee, insurance, loan amount, and interest rate. On closing day, you will meet with the title company and sign all the paperwork to finalize the refinance.

Conclusion

Refinancing is not just beneficial for primary investors. Rental property owners can take advantage getting lower refinance rates to save money and improve their investment. By preparing beforehand and understanding how the process differs slightly for rental properties, you can set yourself up for a successful refinance.

If you are looking for a team that will guide you through this process and answer all of your questions, contact us today. We would love to work with you.

How to refinance a commercial property

Refinancing a commercial property can be a savvy financial decision for real estate investors. By refinancing the mortgage of a commercial property, you have several options to free up cash and change the loan terms. Here is a quick guide on refinancing commercial property.

Reasons to refinance your mortgage

Before making decisions concerning your mortgage refinance, you will want to determine your end goal. Below are some reasons why refinancing may be beneficial to you.

• Lower monthly payment and interest rate–  Many people choose to refinance their mortgage because the current mortgage interest rates are lower than when they initially applied, leading to a lower monthly payment and more cash-in-hand.
• Change mortgage interest rate type – If you went with an adjustable-rate mortgage when you purchased your home but now qualify for a fixed rate, you could refinance to switch rates.
• Adjust loan term –  If you want to save on the total amount of money you pay in interest over the life of a loan, you can shorten the loan term. Alternatively, extending the life of the loan could reduce monthly payments.

Cash-out refinance

Whether you are a commercial investor, cash-out refinancing is a great investment tool. When refinancing, you replace your existing mortgage amount with one that is higher than what you owe on the property. The reason being, you are actually pulling money from the equity of the commercial property use it for other purposes. You can use these funds for any needed renovations or repairs. This can help to increase the value of the property. You could also choose to invest that money into new projects or simply have emergency cash on hand or you can simply hold onto the money for a rainy day or when new opportunities may arise.

Easy ways to prepare for a commercial property refinance?

To prevent any closing delays or mishaps, there are ways you can prepare in advance for a smooth closing process. Here are some things to consider if you are looking to refinance:

1. Establish your goal: Are you looking to lower your monthly payment and interest rate? Do you want to change the type of rate? Are you looking to cash out on the property’s equity? These are all questions to consider beforehand to make sure you are choosing the right refinance loan.

2. Prepare your documents ahead of time: You will be asked to provide several documents for your refinance. Your lender will need to confirm your financial history, income, and assets, among other things. Here are some examples of documents you will need:

• Last two pay stubs / rent receipts
• Bank statements for savings, checking, and business accounts
• Last two tax returns and W-2s
• Copies of rental lease(s)
• Proof of homeowners insurance

If you are an investor, lenders will also consider the business’s operating history, net operating income, and credit.

Key takeaways:

• Refinancing your commercial loan can lower your monthly mortgage payment to free up money for other projects and investments.
• Homeowners and investors can take advantage of ‘cash out’ refinances to get money on hand to invest back into the property to increase the value.
• There are ways all borrowers can prepare in advance for a smooth refinance process.

• You want to get out of an adjustable-rate loan. If you took an ARM loan because of its attractive introductory rate but now wish you had a fixed-rate loan, refinancing may be your best bet. You can apply for a fixed-rate loan and have a more predictable mortgage payment, cash flow, and profits from your investment properties.

• You can afford a shorter term. If you took a 30-year term, but are now in a better financial position, you may consider refinancing into a shorter term. Commercial property mortgage loans are available in 1-, 5-, 10-, 15-, and 20-year terms allowing you to save money on interest and gain equity in the rental or investment property faster.

If you have a mortgage on a property now but wish you had a lower interest rate or wish to tap into the rental or investment property’s equity, you may benefit from mortgage refinancing.

A mortgage refinance means you pay off your existing mortgage with a new mortgage. The new mortgage will have different terms and sometimes a different loan amount. It’s a great way to save money on interest and or get access to the equity you’ve built up in the investment property. Whether you need to refinance it for an emergency fund, to pay a large expense, or to expand your real estate investment portfolio.

Reasons to Refinance a Mortgage

Refinancing a mortgage costs money, so keep that in mind. Even when interest rates drop, do the math and make sure it makes sense to take out a new loan. Remember, refinancing a mortgage is like starting over. In most cases, it makes sense to do so.

Here are the top reasons to consider refinancing a mortgage.

• You can lower your payment. If interest rates decreased and/or your qualifying factors improved, you may secure better financing terms, saving you money. If you take out a rate/term refinance, you refinance strictly to reduce your interest rate. Or you get a more attractive term and save money.

• You want to tap into your rental or investment property’s equity. A Cash-Out Refinance may be right for you! Certain uses of your property’s equity can be a smart choice, especially if you’re trying to expand your real estate portfolio. Using the equity from one investment property to buy another furthers your investment and increases your rate of return.

• You want to get out of an adjustable-rate loan. If you took an ARM loan because of its attractive introductory rate but now wish you had a fixed-rate loan, refinancing may be your best bet. You can apply for a fixed-rate loan and have a more predictable mortgage payment, cash flow, and profits from your investment properties.

• You can afford a shorter term. If you took a 30-year term, but are now in a better financial position, you may consider refinancing into a shorter term. Mortgage loans are available in 10-, 15-, and 20-year terms allowing you to save money on interest and gain equity in the rental or investment property faster.

The Downsides of Refinancing a Mortgage

Like any personal finance decision, there are downsides to refinancing your mortgage. Here’s what you should consider before deciding.

• You may increase the loan’s term. If you keep the same term and don’t account for the time you’ve already paid into the loan, you could extend how long it takes before you own the investment property free and clear.

• You may pay a higher interest rate. If you take out a cash-out refinance, you increase the lender’s risk, which may result in a higher interest rate. If you need the funds for a mandatory expense or it’s the only way you can expand your portfolio, though, it still may be a good choice.

• You’ll pay closing costs. It always pays to determine your break-even point or the time when you’ll pay the closing costs off with the monthly savings you earn by refinancing. If it’s a short time, you’ll benefit from refinancing. If the break-even period is many years away and you aren’t sure you’ll even own the property still, it may not be worth it.

Qualifying for a Mortgage Refinance

Just like when you bought the investment property, you must qualify for a mortgage refinance. You must prove you can afford the loan and you have a good track record with your other debts.

While each loan has different qualifying requirements, here are the general requirements to refinance:

• Decent credit – Most lenders require at least a 640-credit score to refinance your loan. The exact credit score required depends on the loan program chosen and your other risk factors, but any credit score over 640 increases your chances of refinancing.

• Low debt-to-income ratio – Showing you can manage your debts and aren’t in over your head is important. A DTI of 43% or less will increase your chances of approval the most. Your DTI is a comparison of your monthly debts to your gross monthly income (income before taxes).

• Money on hand – If you have reserves, it shows that you won’t default on your mortgage even if you lose your job. Any money you have in a savings account can qualify. Lenders determine your reserves by the number of mortgage payments the savings cover. The more reserves you have, the better your chance of approval.

The investment property’s value – All refinances require another appraisal to ensure your investment property’s value is high enough to qualify for another loan. If you took care of your rental or investment property and other properties in the area appreciated through the years, the appraisal shouldn’t hold you back.

Is Refinancing Right for You?

Refinancing isn’t a one-size-fits-all approach. Do your research and determine if you’ll benefit from a mortgage refinance. Will you save money monthly or benefit by taking cash out of your equity? Do you qualify for a lower rate or better term?

Look at the big picture. If you benefit from refinancing, shop around for the best rates to ensure you get the most out of refinancing your mortgage.