Refinancing has made its way into the headlines recently for the ridiculously low-interest rates that can be seen since the COVID-19 crisis began. Property owners everywhere are interested in refinancing, and they want answers.
- Why, when, and where to refinance
- Investment property vs. primary residence refinance
- How to refinance an investment property
Why Should You Refinance Your Investment Property?
The benefits of refinancing an investment property are plentiful. The most obvious benefit is that your monthly mortgage payments will decrease if you lock in a lower rate, which will give you the maximum return on investment. By lowering your monthly payment, you’ll also be increasing your rental income, so you’ll be saving and making money simultaneously.
Other options are to use the equity in the investment property to purchase additional properties or fund other investments. The reasons to refinance are plentiful, but at the end of the day, the choice has to make sense for you and your needs and goals.
When Is the Best Time to Refinance an Investment Property?
Due to the state of the economy as it stands, right now is one of the best times to refinance, as many mortgage brokers continue to tell the public. Interest rates are historically low at this point, and there’s no telling when they will be this low again.
Generally, the best time to refinance is when the interest rates are low and property values are high. It’s an ideal situation. If you’re looking into refinancing and haven’t gotten your ducks in a row yet, now would be an excellent time to get things started.
Related: Questions to Ask a Mortgage Lender
Why Interest Rates are Higher on Investment Property vs. Primary Residence
Banks consider loans for investment properties to be more of a risk than a primary residence, and that is reflected in the interest rate. Unfortunately, it makes a lot of sense. If a person finds themselves in financial trouble, they will most likely prioritize paying their home mortgage and living expenses higher than their business expenses.
Because of that, banks protect themselves from the risk by raising the interest rate. A rate of 0.5% more is relatively standard, but different banks have different interest rates. If the rate is too high, it might not make sense to refinance at that time. Make sure to keep in mind that you’ll also be dealing with brokerage fees, closing costs, and unforeseeable events. If the rate is a bit too high but tempting then it’s probably going to be more demanding of a commitment than you initially thought.
Wondering what your rate might be? Use Mares Mortgage’s Rate Checker to find out!
How To Refinance an Investment Property
Gather all the Necessary Documentation
Getting all of the paperwork together for your refinance may take some time if you haven’t gathered any of it yet. Here’s what lenders will ask for:
- Copies of W-2 forms: These are used to confirm your employment history and your income. If you’re self-employed, you and everyone on the loan may be asked to provide full tax returns.
- Proof of income: Banks usually want to see original pay stubs for the last 30-60 days.
- Copy of your title insurance: This confirms that the property is legally yours to refinance for the mortgage company.
- Copies of asset information: This is standard practice.
- Proof of homeowner’s insurance: This confirms for the lender that you’re covered for their investment if need be.
Find a Mortgage Lender
Finding a mortgage lender is extremely easy today. But, just because there are tons of accessible options doesn’t mean that they’re all good for you or good at all. Loans for refinancing are offered at credit unions, private lenders, banks, hard money lenders, and other places.
Each lender has different terms and requirements for refinancing investment properties. That makes it super important to vet your options thoroughly. Make sure you get at least 2-3 quotes before making a decision. Please use a trustworthy and knowledgeable lender.
Also, please remember that lenders have to run a credit check most of the time to give you an accurate quote. Having ten hits on your credit score from quotes is unfavorable for anyone. However, if having your credit run bothers you more than others, make sure to be clear with whoever you’re speaking to that you would like to hold off on the credit check even though the quote provided may not be reliable because of it. It won’t be a problem.
Apply and Lock In Your Mortgage Rate
Once your application for refinancing is approved, you should be provided with the option to lock in your interest rate. Locking in the rate means the lender is committing to that rate. Lenders usually lock in rates for anywhere between 15-60 days, depending on the lender.
You’re not required to lock in your rate, but if you don’t, you’ll be “floating,” which means that your rate can shift up or down at any time before closing. That’s not exactly secure or comforting!
Proceed with Underwriting
Underwriting is the step in the refinance process where company representatives called underwriters review and evaluate all of the documentation that you were required to send in. They verify that the property is in good condition, confirm your income, and confirm your assets.
Almost every single lender orders an appraisal, too. It’s to get the current market value for the home. The appraisal also shows you and your lender that the loan agreed upon is appropriate and fair. Property taxes can be estimated from an appraisal as well, which helps to estimate escrow costs.
If you’ve made any updates or renovations, make sure to write them down and inform your appraiser. That can make a huge difference!
Close on Your New Loan
The closing is where all papers are signed, and last-minute questions are answered. At least three days before closing, you should receive your closing documents. These lay out all of the many details of your new loan, closing costs, and fees. If you have any questions at all, do not, do not, do not hesitate to ask them. Once you’re locked into your loan, there are no making adjustments on your end.
So, refinancing an investment property isn’t all that terribly more complicated or scary than any other refinance. While the process itself can be intimidating or frustrating, a wisely chosen refinance venture can change the quality of your life.
The key to a successful refinance, investment or otherwise, is research and preparation. As long as you deeply understand your specific needs and, eventually, which companies best suit them, you’ll be in good shape. Mares Mortgage are the perfect people to contact for a trustworthy, knowledgeable, and personally committed mortgage broker–it is a family business, after all. Mares been taking care of property owners like they are family for over 20 years. They genuinely love helping their clients find themselves in a better, more secure financial standing. Let them help you today!
Related: Reasons to Refinance Your Home