What Are The Costs Of Refinancing An Investment Property
Refinancing an investment property can be a costly process. Depending on your individual situation there are long-term benefits to a refinancing, but the associated costs may also mean its not the right option for everyone. Costs will vary depending on the conditions of your refinancing and whether youre staying with your current lender or opting for a new lender. The costs to refinancing an investment property can include but are not limited to:
- Set up costs and home loan application fees when refinancing to a different lender.
- Exit fees from prior investment property loan.
- Discharge fees and settlement fees for your prior mortgage.
- Break fees will apply if the borrower opts to refinance from a fixed loan during the loans period.
- Lenders mortgage insurance will likely apply if refinancing more than 80% of the propertys value.
Why Refinance Your Investment Properties
The great thing about owning property is that it is a stable investment that typically only goes up in value, and on those rare dips, you simply need to hold until the recovery. As such, its hard to lose with property investment.
If you already own one or two properties and wish to invest in more, it is possible to scale, all you need to do is refinance investment properties. essentially taking out new mortgages that release equity back to you and allow you to use that as the deposit on another property that is also mortgaged. In this way, you can grow your portfolio, keeping each property rented out. Most tenants are reliable, hard-working types who will pay you for years, as long as the property is maintained and you do not violate their rights to quiet enjoyment.
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What Lenders Are Looking For When Refinancing
Lenders tend to be more strict when it comes to financing investment properties and second mortgages. Thats because the risk of default is higher. Typically, a property owner is more likely to stick it out with their personal home than an investment property in hard times.
Because of this, lenders require you to have a good credit score, a low and stable debt-to-income ratio, a bigger down payment , and more in cash reserves to qualify for an investment property refinance.
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How To Refinance Your Investment Property
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Choosing to refinance your investment property can free up money for additional investments, provide better loan terms or improve cash flow, but it can be a costly undertaking. Plus, an investment property refinance isnt as easy as refinancing the mortgage on your main home.
It can be daunting to meet stricter cash reserve minimums, rental income accounting methods and equity requirements, but its not impossible.
It’s A Good Time To Refinance An Investment Property
The price of the homes is a huge increase. The median home price for homes rose by more than 20% between 2021 and 2022, CoreLogic said. It’s also an ideal time for investors to sell their property for rent for cash. The cash may also be used to buy more investment property. With the rate on mortgages still on the move, a rental house owner may want to invest their equity. Tips for achieving the best refinancing rate are listed below in a variety of places below to help you get best cash out refinance for investment property.
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Best Ways To Calculate Your Property Market Value
The first step in deciding if you should refinance your rental property is to determine the fair market value. Then, compare the property market value to your outstanding loan balance to determine how much equity you have.
Doing this will give you a better understanding of how you could benefit from refinancing, and whether or not a cash-out refinance makes sense.
When you apply for a refinance loan on your investment property the lender will order an appraisal to determine the market value. However, there are also several ways you can calculate the market value of your property on your own to get a feel for what your house is really worth.
Broker price opinion is done by a licensed real estate broker. Sometimes the broker will charge a small fee for the work other times they will waive the fee and hope you do business with them in the future.
One of the biggest advantages of getting a BPO is that the broker has his finger on the pulse of the marketplace and understands if market values are trending up or down. On the other hand, some brokers may inflate the value of your property as a motivation for you to sell or give them a pocket listing.
Many real estate investors will ask their broker for a price opinion, then do a reality check by using additional methods to estimate their property value.
Investment Property Loan Faq
Do you need 20 percent down on an investment property loan?
That depends on your lenders rules and the type of mortgage you want. Often 15 percent down is enough for a conventional loan. And for multifamily dwellings where you occupy one unit, you could put down 3.5 percent , 3 percent , or even 0 percent , although these are not considered true investment properties.
Can you put 3 percent down on an investment property?
You cannot put 3 percent down on a true investment property. But, as discussed above, a mortgage from Fannie Mae or Freddie Mac has a minimum 3 percent down payment for a multifamily dwelling where you live in one unit. So you can buy with one of these loans and still generate rental income from the additional units in your home.
Can you get a 30-year loan on an investment property?
Absolutely! Most borrowers do.
What bank will loan me money for an investment property?
Many banks, mortgage lenders, and other lenders are happy to lend on investment properties as long as you meet lending criteria, which are stricter than for your main home. In addition, investment property loans are easier to find when the economys doing well. You might have a harder time finding investment property loans during economic downturns, like when the Covid pandemic was at its peak.
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Differences Between Primary Home And Rental Home Refinance
Refinancing isa great way to take advantage of more favorable loan terms for example, maybe you want to switch from an adjustable-rate to a fixed-rate because the current market interest rates are low.
However, there are some differences between getting your primary residence refinanced and getting a rental home refinanced. Lenders know that the borrower wont want to lose their primary residence and will do everything they can to avoid defaulting. However, theres a bigger risk for lenders when it comes to borrowers refinancing rental properties. If they fall into financial hardship , they will pay their primary homes mortgage first before they pay the mortgage on their rental property. Theres a greater chance that they will default on their rental property.
All this means that the rates and terms for a rental property refinance are less favorable than those on a primary residence, and also that the qualification standards are much stricter. Many lenders will require that the rental property owner provide a number of documents in addition to meeting the typical refinancing requirements. These documents may include:
Some lenders may even require that borrowers have at least six months worth of mortgage payments in their bank account in the event that they lost their tenant for an extended period of time.
Are You Looking For The Best Refinance Mortgage Rates And Information To:
- Lower Your Rate?
- Remodel or renovate your home?
- Any combination of the above?
We are laser-focused on approving mortgage refinances for these reasons or any other reason in a simple, no-nonsense way, at the absolute best rate.
As a leading Canadian Mortgage Broker having worked with hundreds of mortgage refinance transactions, I take all the best information I have learned over the past 14 years and distilled it into the article below. Or feel free to connect with us for a no-obligation conversation.
For your best refinance result, lets take a look at:
- What is a mortgage refinance?
- How does a mortgage refinance work?
- Pros and cons of refinancing is it worth it?
- Step by step how to complete a mortgage refinance from start to finish.
- Top tips and advice for your best refinance result
- Refinance Vs Home Equity Line of Credit
- Refinance if you have low credit.
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How Do I Avoid Paying Closing Costs
There are two ways to avoid paying closing costs on a mortgage. You can ask the seller of the property that you are buying to contribute 3% of the purchase price towards your closing costs or pre-paids or contact a mortgage broker that has their compensation level set to no more than 2%. Preferably, your first goal should be to have the seller cover the closing costs so you can receive a lower mortgage rate.
What Other Fees And Costs Are Associated
You will need to get your property appraised so that the lender can determine the loan-to-value ratio, an important factor in determining your eligibility as well as your rates. In addition to paying for the appraisal, you will also have to pay for closing costs, which include origination fees, local filing fees, and more. Expect the closing costs to be roughly the same as the closing costs on your initial mortgage.
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Apply For A Mortgage Refinance
Once youve determined who the best fit is, youll need to fill out the lenders full application. Having your documents on hand here can help, as the application will require detailed info about your income, debts, and finances. The lender will also pull your credit.
Generally, filling out the full application can take up to an hour, so make sure you clear some time in your schedule. You may also want your spouse or co-buyer nearby to answer any questions about their income or employment.
Make Sure That Refinancing Is Right For You
If you need a cash-back loan to pay for repair work, then you may have to refinance. However, if youre considering refinancing for home improvements, additional investments, or to lower your costs, its important to do the math. For example, if youve almost paid off the initial loan on your investment property and youre thinking about refinancing so that you can take advantage of the lower interest rates, consider how much the closing costs will be. If the closing costs are high, they could negate what you would have saved on interest for the remainder of your loan term. Always calculate the short-term and long-term costs vs savings and potential profit before applying for a rental property refinance loan.
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Refinance Consideration #: How Does Refinancing Tie Into My Long Term Plans
Before you read any further, make sure youre clear on your short term, medium term and longer term financial goals and how youre progressing toward them as of right now. Your goals six months ago will be different from the goals you have today. A regular review and refresh of your financial goals is part of your property investor job description.
The sheer volume of loans and loan products on the Australian market are staggering. To cut through all the noise, arrange a conversation with your mortgage broker to discuss your current financial situation. Prepare to cover off the following in your conversation with your mortgage broker:
- Your current short, medium and long term financial and lifestyle goals.
- A snap shot of your current financial situation. Use our free template. Youll find it at Capital Properties > Resources & Tools > Preliminary Finance Assessment.
Increase Your Rental Income
Are you getting the most rent possible out of your investment property? A few repairs or upgrades might allow you to rent the property out for more money. Some of the most common upgrades you can make to increase your cash flow include:
- Adding an additional segment to the home to increase living space
- Finishing a basement and renting it out as a separate apartment
- Replacing the roof and missing tiles
- Upgrading the major appliances, cabinets and floors
- Repainting the interior rooms to make the property look nicer
- Finishing or maintaining an outdoor structure like a pool or fence
- Upgrading the furnace or central cooling system
Improving the livability of your space builds goodwill with your current tenants and increases the market value of your home. This means that you can charge more in rent in the short-term and make your money back by selling the property for more money later on.
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Why Are Interest Rates Higher On Investment And Rental Properties
The main reason is that investment properties are riskier for lenders.
Not only are you more likely to default on the loan than someone who lives there, but your income also relies on the property. So, if the market turns sour, the home loses value and your income takes a hit both of which are risky for the lender.
Refinancing When Owning Personally
If you own the property personally, there is no immediate tax implication when you refinance the property.
However, you need to pay attention to how you use the funds from refinancing.
In Canada, you are only allowed to deduct the interest on money borrowed for investment purposes. Like mortgage interest incurred to earn rental income is deductible.
But, if you use the funds to pay down your principal residence mortgage, the interest related to the refinanced money, i.e. $240K from our example above isnot tax deductible.
I generally tell my clients to use those funds to pay off the initial line of credit that they used to finance the purchase of the rental property. Or use it for a down payment on their next investment property. By continuing to use the funds for investment purposes, you can keep the entire mortgage interest expense tax deductible.
Cash flow at sale
After years of appreciation and refinancing, you may have taken a lot more out than what you have put in.
Say, you purchased the rental property for $250,000 a number of years ago with an initial mortgage of $200,000.
Youve refinanced the property a few times over the years and currently the mortgage has an outstanding balance of $500,000.
And you sold the property for $850K.
Your capital gain is $600K .
Assuming you pay the highest marginal tax rate of approximately 50%, the tax liability is around $150K.
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How To Do A Cash
With cash-out refi, you refinance your current mortgage on the real estate you own. The new loan is for a larger amount than the existing mortgage. The lender issues you the difference between the two mortgages in cash. This strategy allows you to use some of the equity youve built with the investment property as cash.
When you complete a cash-out refinance, you can get money to use for a down payment on future real estate purchases, potentially helping you build more income. Or, you can combine it with delayed financing.
What Are Todays Cash
Current mortgage rates are low still half their historical norm of over 8%. Its a limited opportunity to cash-out a rental property and perhaps find a lower interest rate, too.
Check todays rental property refinance rates to see what you qualify for.
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