Investing in real estate is one of the most popular ways to boost your wealth. Since numerous people are purchasing apartments and homes to earn income from rent, you should know that more than seventy million rental properties are currently on the market.
Investors do not use cash to purchase these properties, but in most cases, get home loans. Therefore, if you own a particular investment property, the chances are high that you must deal with significant interest rates.
It is vital to check here to learn more about this particular topic.
Of course, everything depends on when you took the loan and the credit score you had beforehand. Still, you can take advantage of lower rates by refinancing your mortgage.
When refinancing, you should know that it is entirely different for primary residence and investment property. You will need to provide more documentation, which is an essential consideration to remember.
Nowadays, fixed interest rates for mortgages are average three percent. If you have a higher rate than we mentioned, you can find ways to reduce it through the refinancing process.
At the same time, you can change the length of your mortgage or use cash for additional investments.
Let us start from the beginning.
Why Should You Refinance an Investment Property?
We can differentiate numerous situations where you should deal with refinancing instead of paying a current rate.
- Reduce Interest Rates – One of the biggest reasons people choose the refinancing model is to reduce overall interest rates. Three years ago, fixed rates were five percent for thirty-year loans. If you have an older mortgage, the chance is high that you are paying a higher rate. In August 2021, the average rate is just three percent, which means you can take advantage of changes and reduce the amount you are paying. Of course, you will need a decent credit score, which will help you obtain a lower interest rate and qualify for it in the first place. Still, you can save thousands of dollars throughout the process.
- Change Terms – While refinancing your mortgage, you can choose additional terms. For instance, you can reduce the years for repaying the entire loan. As a result, you can repay everything faster, which will provide you peace of mind. On the other hand, you can easily switch from an adjustable-rate to a fixed one, which is another crucial consideration you should remember.
- Use Cash for Other Investments – If a property comes with a higher worth than the amount you are paying and owing, you can take advantage of equity for renovations and repairs, which will help you flip it faster and deal with a mortgage without any additional problem. That is why you should check out more about cash-out refinancing, which means borrowing against the equity of your property. That way, you can get more balance on the current mortgage while taking advantage that will provide you peace of mind.
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The Process of Refinancing Investment Properties
As mentioned above, refinancing investment properties is not a straightforward process, which differs from the one you can get for a primary residence. Therefore, you should follow the steps we will mention in the further article:
- Create and Build Equity – The main idea is to build equity within your property before making up your mind. Of course, everything depends on the lender you choose, but you will need to ensure your LTV or loan-to-value ratio is not higher than seventy-five percent. It means you have repaid at least twenty-five percent of the property, which means you are more likely to refinance a loan.
- Documentation – You should think about documentation with an idea to refinance a property that will provide you peace of mind. Therefore, you will need the following documents: business and personal tax returns from the last two years, latest pay stubs or W-2 forms, Internal Revenue Service Schedule E, which includes Income and Loss form, as well as rental income information. Finally, you will require lease agreements for the overall property.
- DTI (Debt-to-Income) Ratio – Most lenders will require your DTI at most forty-five percent or less to get the proper refinance. If it reaches over the mentioned threshold, you can improve it by paying down any existing debt you have before you decide to apply.
- Appraisal – Keep in mind that the refinancing process requires professional assessment, which means evaluating your home’s rental income potential and current value as well. That way, an appraisal will help you determine whether you have enough equity to handle the process with ease.
- Closing Expenses – It is vital to pay closing costs for refinancing, the same way as any other financial product you choose. Remember that the average amount is five thousand dollars, but everything depends on the location and loan size you wish to get.
Refinancing is a highly beneficial option if you wish to lower down your rates or get better terms than before. Of course, both terms and rates can vary, which is why we recommend you get various quotes before you make up your mind.
Mortgage Refinancing Expenses to Remember
Since interest rates have reached historic lows, most property owners decided to find ways to refinance an entire debt. Even though the process can help you save money in the long run, you should know that it comes with certain closing costs and one-time fees you should pay.
At the same time, you should pay them before you set the interest rate and other terms, while monthly payments are essential afterward, similarly to other mortgages.
With this option, you will have to handle numerous fees depending on your property’s state, size, and location.
Some of them are mandatory, which means you should pay to your country or state. Other ones go to the lender as processing fees, while at the end, you should pay closing fees that will provide you peace of mind.
The most common costs you should expect throughout a process include:
- Loan Fees include a credit report, origination, tax service, document preparation, underwriting, wire transfer, office administration, and other fees that are essential for the process.
- Inspection and appraisal fees
- Title fee
- Mortgage recording fee
- Closing costs
Everything depends on the lender you decide to choose, who will estimate the amount you should pay for closing beforehand. The overall amount varies based on region and lender, but they range between thousand and five-thousand dollars.
Steps for Reducing the Refinancing Expenses
You can find many lenders that will advertise themselves as no-expenses refinance; you should avoid falling into this trap. Instead, you must pay brokers, appraisers, lenders, and other professionals for their work, which comes in the form of additional costs.
At the same time, you can add closing costs within your new loan, but that will increase the overall amount, which means you will have higher monthly payments.
Still, you should ask for the amount and be aware before you make up your mind. The best way to reduce overall expenses is to talk with a few lenders at the same time.
That way, you can compare their closing expenses and interest rates, among other things. You can narrow your search and choose the best option based on your financial capabilities by getting relevant estimations.
A few days before closing a deal, you should get a statement, which will help you review it before signing anything. At the same time, if you notice some fees, you should ask the lender beforehand to explain everything to you.
Still, the refinancing process is appealing to most people due to low-interest levels. However, it would be best to talk with professionals or research yourself to determine all fees you should pay before making up your mind.
Besides, you will need money at your disposal, which will prevent potential issues from happening.
That way, you can prepare for all the following costs you need to handle before getting the lower interests and other benefits mentioned above.