Should You Refinance Your Rental Property?

When deciding to refinance your rental property, it can unlock a wealth of cash-flow opportunities. They can be perks such as improved loan terms, attractive interest rates and lower monthly payments.

Refinancing can be a smoother process than the financing your got when you originally bought the property. Why? Primarily because you’re not dealing with a sales contract, closing dates or repairs. Simply put, it is nothing more than replacing your current loan with another one. But, while it may seem like an easier move, a plan should be in place. For example, use the same logic as when you got the original loan. If you’re holding long-term, look for a fixed-rate loan. If you’re interested in a shorter term, look for an ARM or a hybrid.

Refinance Your Rental Property to Help You Save

Refinancing can help you save for a variety of reasons. One of the most common reasons why people refinance their rental properties is that rates have dipped below what they’re currently paying. Because of this they end up looking for a better rate. If you’re planning to hold onto your investment property long enough to recover closing costs associated with the mortgage loan, this is a good idea to consider. Some say that rates should be 2% lower than the rate that you currently have. However, that “rule” isn’t set in stone.

Instead of worrying about a certain percentage or targeting a specific rate, focus on your closing fees. You want to keep mortgage acquisition costs as low as possible. This means you’ll need to avoid things like origination charges for processing the new loan application.

Additionally, many people take advantage of refinancing their rental property in order to roll closing costs into their current loan amount and reduce monthly payments on the loan. Lowering monthly payments equates to additional cash flow. Having additional cash flow can help leverage future investments.

Another reason to refinance your rental property is to convert from a variable rate to a fixed rate or adjust loan terms. A variable interest rate (adjustable rate) can result in lower home payments over the short-term. Yet, that can change if the market rates were to rise. A fixed-rate, on the other hand, stabilizes mortgage payments over the term of the loan, no matter what happens with the market. And adjusting loan terms allows investors an opportunity to switch from a 15-year interest rate to a 30-year rate. This can provide subtle, yet significant financial benefits.

Finally, refinancing a rental property can eliminate Private Mortgage Insurance (PMI). Commonly required by lenders when the loan-to-value (LTV) ratio is more than 80 percent or when borrowers pay less than 20 percent down, PMI protects lenders from the risk of buyers falling into default.

Considerations Before You Refinance Your Rental Property

When you refinance your rental property, you’ll need to qualify all over again and go through the same process as if it were a brand-new home purchase. This means that, if things have changed from a credit perspective, anticipate possible delays.

In the end, refinancing will depend on a myriad of factors that are specific to your unique situation. If the reasons above apply to you, refinancing may prove to be the right financial move, including the potential to grow your investment even further.