It’s still a good time to start refinancing your investment property. Here’s why
Repayment costs depend on the terms of the loan
Let’s say an investor has a fifteen-year loan of $ 250,000 at four percent interest. She receives a monthly payment of $ 1,849. With a thirty year loan, she receives a monthly payment of $ 1,194. The fifteen year monthly payment is 55 percent higher than the thirty year for the same amount at an identical rate.
In return for the lower monthly installments on a 30-year loan, a borrower pays significantly more interest. Taking the same example of a $ 250,000 mortgage at four percent interest, on a 30 year loan, the interest to the end of the loan would be $ 179,674, for a total of $ 429,674. If she took out a 15 year loan, she would only pay $ 82,860 in interest on the $ 250,000 for a total of $ 332,860. Assuming the same interest rate of four percent, that’s only about 46 percent of the interest on a 15-year loan compared to what it would pay on a 30-year term.
Another investor who wants to keep the monthly installments as low as possible could extend the term of his loan and exchange the lower installments for more interest in the long term. Another faced with fluctuating monthly payments due to fluctuating interest rates on a floating rate mortgage might choose to switch to a fixed rate mortgage for more predictable monthly costs.
But it’s not all good news. A disadvantage of refinancing are the closing costs. Prepare to pay creation fees, evaluation fees, title insurance fees, among other things. The total closing cost can be anywhere from two to six percent of your loan amount, so for a $ 250,000 mortgage, a borrower can expect to pay between $ 5,000 and $ 15,000.
Cash-out refinancing enables investors to expand their portfolio
Real estate values rise and mortgage rates fall – a perfect formula for investors to take advantage of the appreciation of their homes, to expand their portfolio or to improve existing properties. If you have enough equity, you can do so through a cash-out refinancing.
The principle is simple: an investor with a loan on a property takes out a new loan in a higher amount, pays back the existing loan and leaves with the remaining amount as cash. The investor can use these funds to improve a property, for example by adding a house, finishing a basement and renting it separately, upgrading an HVAC system, or replacing aging cabinets and floors. These steps can allow her to charge higher rents, increase tenant goodwill, and improve the home’s resale value. An entrepreneurial investor could also use the money to expand their portfolio with a down payment on a new property.
But there are hurdles to obtaining these loans.
First, it’s harder to qualify. The investor must have more than 25 percent home equity and good credit, typically a score of 680 or higher, but preferably 740 or higher. She must also provide evidence of cash reserves, usually up to an annual amount of payments, on the property to be refinanced. If she has real estate loan balances in addition to her residence and the property being refinanced, she must also have reserves of up to six percent of the unpaid balance. Finally, there is a six month waiting period to refinance after completing the first loan.
To determine the eligibility of borrowers, lenders use the loan to value (LTV) ratio, which is determined by the size of the loan compared to the value of the home. For example, if an investor has a $ 90,000 mortgage on a $ 100,000 home, the LTV is ninety percent because the loan is ninety percent of the value.
The Fannie Mae and Freddie Mac guidelines may allow seventy to seventy-five percent LTVs. These may be too strict for some investors looking for cash-out refinancing. Some lenders have more lenient standards, especially after the agency that regulates them sets a tighter limit on the number of mortgage loans they can buy.
What do investors need to know before refinancing?
Borrowers need to be realistic. In any environment, they need to know the value of their property and the status of their loans to avoid surprises. Banks will request an appraisal to confirm the value of a property.
Changes in income status due to the Covid-19 pandemic can also affect which loans they can qualify for.
“Anyone who is self-employed or not employed should speak to their credit advisor to make sure they are still qualified,” says Sonia Eckard, Mynd credit advisor. “There are many temporary policy changes due to Covid interruptions. They may not qualify on their tax return if they are self-employed or receive a commission based on sales. “
This article originally appeared on Mynd.com and was syndicated by MediaFeed.org.