Thursday, 30 July 2020 13:29

3 Smart Reasons Savvy Investors Refinance Rental Properties

pexels photo 1288483We’re ending 2019 with historically low mortgage rates. This means there’s no better time than now to refinance your mortgages. It’s especially a good time to refinance a rental property. In fact, the more residential property you have in your portfolio, the more money you can make right now.

Making money is the easy part though. Many people see the immediate returns of pulling equity out or erasing credit card debt. But these moves can have detrimental effects in the long run. It’s important that you refinance for the wrong reasons. Otherwise, you may just end up back in the same place you’re already at but with one less option.

 

Here are the top three reasons to refinance your home or rental property by the end of this year.

1. Refinance to Grow Your Business

If you’ve been paying attention to financial news the past year, some of the biggest headlines revolve around historically low-interest rates and the possibility of a recession. I’m not the Oracle of Omaha, and even Warren Buffet can’t predict the future.

What I can tell you is that you can be recession-proof with a widespread investment portfolio. Pulling money out of your real property to gamble on stocks and cryptocurrencies is a bad idea because you’re not in control of those businesses. What you are in control of is the businesses you’re running on your property.

Whether you work from home, rent out space in your own home, or own multiple properties that you use for business and pleasure, now’s the time to refinance and expand. Refinancing now doesn’t necessarily mean you need to purchase the property right away. The money can sit in a savings account earning interest while you shop.

It can also be used immediately. You may have trapped equity in your properties that can be released with more advanced investment strategies. Blanket loans, for example, can roll all of your properties into one loan, regardless of what type of property they are or where they’re located.

You may even consider refinancing to purchase state-of-the-art 3D printers capable of fueling an additive manufacturing facility in your own garage. Every store you see on eBay and Etsy has a lot of business operations behind them. With the gig economy flourishing, there’s no better time to start a business from home.

If you cater to these audiences, you’ll be part of a rental community and never have issues getting financed.

2. Refinance to Secure Lower Interest Rates

As Investopedia points out, refinancing is best done when you can lower your interest rate by at least one percent (although two percent is ideal). Reducing your interest rate is the single most effective way to lower your mortgage payment, no matter which type of loan you took out.

Let’s say you have a $1000 per month mortgage payment. That $1000 is not going directly toward your mortgage. In reality, you likely have $100 going into escrow for next year’s insurance, $100 going toward next year’s tax payment, and only $800 actually paying your mortgage.

From that $800, depending on the terms of your loan, anywhere from 20-80% of your payments are going toward interest. If you have a 30-year loan, that interest is calculated in advance over the entire 30-year period. The only way to get ahead is by making extra payments toward the principal balance in the middle of the month while still making your regular mortgage payments.

Otherwise, lowering interest rates by one to two percent lowers monthly payments by lowering the amount of money you’re throwing away every month on interest payments.

This small change right now could save you hundreds of dollars every month for the rest of your loan term. And with equity built up in your property, you’re more likely to get the best rates. Even if you’re still in the same bracket as you were 10 years ago, you’ll still get lower interest rates based on the new lending environment. That’s why there’s no better time than now to refinance your rental property and your home.

3. Refinance to Shorten a Loan Term

The best way to save money is to shorten your loan terms. The shorter your loan, the lower the interest. You initially may have gotten a 30-year loan, and the idea of financing another when you’re 10 years in can seem daunting. That’s actually the best part of refinancing with a lower interest rate.

When you lower your interest, you can also get a 15-year loan instead of your initial 30 and get the same, or even lower, payments overall. Because lower interest is being charged on a lower amount of time, the overall benefits will be felt across the board in your short-term and long-term goals.

NerdWallet has a great mortgage calculator that shows the real differences between a 15- and 30-year loan. Going from 5.4% interest over 30 years to 3.4% interest over 15 years on a $200,000 property raises your monthly payment from $898 to $1,136 while lowering the overall cost to $244,475 from $363,442. 

This is obviously a simplistic example, but there are resources online to give estimates before you talk to your loan officer.

Conclusion

Refinancing a mortgage, whether on the home you’re living in or a rental property, is a great idea when rates are low. Every single chart and analyst is screaming that 2019 has the historically lowest rates, and there are signs of a possible recession coming.

If you own residential property of any type and haven’t refinanced recently, you need to get on board now. There’s an election coming up in 2020, and we’re entering an entirely new decade and era with a whole new economy from when you first bought your house.

And refinancing rental property is easier than ever with creative solutions from stated income lenders. 

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