Thanks to ease of communication, various rental assistance agencies, and apps like Airbnb, it isn’t terribly uncommon for average people to own more than one property. Real estate is typically a smart investment, and using properties to generate additional income is even smarter. However, new investors often leap into renting without considering what might happen if they can’t collect rent ― if they can’t find tenants or their existing tenants go dark. Without that supplemental income, many investors might drown beneath multiple mortgages ― unless they refinance.
Refinancing a home loan isn’t just an activity for homeowners and their residence properties. In fact, there are a handful of reasons investors shouldn’t forget about this invaluable mortgage tool.
The main benefit of refinancing an investment property is essentially identical to the benefit of refinancing a primary residence: lower payments. There are various home refinance methods ― including refinancing to a lower interest rate, refinancing to a different term, or buying points ― but if refinancing doesn’t end in an overall decrease to the amount an investor is paying for the property, or provide cash in hand to be used for other investments, then refinancing was not executed properly. Typically, though, the lower the amount of money paid each month, the better for investors.
However, know that there are some fees that come with refinancing, including an application fee and an origination fee, that investors must consider. Costs, fees, and penalties can add up to thousands of dollars, which will raise an investor’s expenses for a time. Ideally, the overall savings of refinancing will negate these initial payments, giving investors more cash on the whole.
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Increase Cash Flow
The more money an investor can free up during the refinancing process, the more cash he or she will have in hand. This impacts an investor’s cash flow. It isn’t uncommon for investors to have negative cash flows for long stretches ― and that isn’t inherently bad: One must spend money to make money. Still, a healthy cash flow is important to investors, and will help grow their overall wealth.
Remodel and Repair
One excellent use for spare cash from refinancing is remodeling and repairing investment properties. Every property owner knows that updates and improvements can increase a property’s market value, allowing him or her to sell the property at a profit or increase the rent. Investors should be eager to do such because their primary goal in owning an investment property is to increase their wealth. Some refinancing options even have renovation loans built-in to help investors make cosmetic and structural changes to their properties, thereby making the most of their investments.
Tips for Investor Refinancing
As one might expect, refinancing an investment property isn’t as easy as refinancing a primary residence. Lenders are aware that investors have at least two mortgages ― one on their investment property and one on their primary residence ― and if the investor falls on hard times, the investment property is more likely to suffer delinquent payments. Therefore, lenders usually require investors to already have a substantial stake in their properties before they can refinance. While lenders are flexible in regards to credit scores, income, and cash reserves, nearly all demand a 75 percent loan-to-value ratio on properties before investors can refinance. That means investors must have paid at least 25 percent of the cost of the property, giving them greater incentive to continue paying the mortgage.
Investors might also be interested in knowing that most lenders will not allow a single borrower to acquire more than four mortgages on residential properties. Though investors can own more than four homes, only four can be purchased through traditional loans. The reasons for this are manifold. For one, lenders want to ensure investors can make their payments, and the more loans an investor has, the less likely he or she is to pay them all in full. Additionally, the government wants to prevent wealthy investors from using government-backed loans to acquire too much property, effectively restricting lower-income families’ access to housing.
Finally, homeowners who plan to relocate and rent out their old property are often tempted to refinance before purchasing a new primary residence to skirt around these sticky rules. However, that often constitutes loan fraud. Anytime a borrower acquires a mortgage, he or she must sign an affidavit that he or he intends to occupy that property for at least a year. Moving out before that period is up is legally dangerous, so investors should strongly consider either waiting out the year or following the clear avenues for refinancing investment properties.