It was only a few short years ago that mortgage interest rates and programs dominated the real estate landscape. Since the mortgage collapse, much of the talk has been about how difficult the loan process is and how much things have changed. The process may be difficult, but interest rates have held steady and have even come down recently. In fact, rates are near historic lows. Having said that, now may be a good time to consider refinancing. If you tried to refinance a few years back and were rejected; now is the time to explore all of your options again. With interest rates dropping and new loan programs being added, a refinance could be an unexpected way to give your portfolio the update it needs.
Arguably the biggest reason that many refinance requests fell through: a distinct lack of equity. All loans need some amount of equity, but investment loans need between 20-30%. With the market having turned in many parts of the country, values have rebounded, leaving homeowners with equity they may not have realized they had. Before you look at rates and potential payments, look at what has sold or is on the market in your area. If you are friendly with a realtor, have them tell you their honest opinion as to where your value may stand. What you thought your property was worth just a few months ago may be higher today. If you have equity, you will have options.
Regardless if you are an investor or not, many property owners don’t know exactly where they stand with their mortgage rate, terms or amount owed. In addition to equity, you need to make sure you are familiar with EVERYTHING before considering a refinance. Fixed interest rates are near all-time lows. If you have an adjustable loan, now may be the perfect time to get out. If you have an adjustable rate, you have seen your payment dip dramatically over the past few years. However, when the market turns, it will happen quickly and you will have missed your chance to convert to a fixed rate. Take a look at how many years you have left and what you still owe. If you have a significant number of years remaining, a refinance will make sense for you in the long haul.
When most people think of a refinance, they automatically think of reducing their monthly payment. This is certainly one option, but it is far from the only one. With fixed rates low on 15 year programs as well, one option is reducing the number of years owed from somewhere in the twenties down to fifteen. Depending on the existing interest rate, the new payment may be slightly higher. However, you are knocking off all of the years owed down to just fifteen. Plus, with rates where they currently are, the payment may not be that much higher than where you are now. Lowering your term will not only dramatically decrease the total amount owed, but it will help accelerate future equity and lead you to free and clear ownership that much faster. If cash flows are good and the equity is there, a refinance needs to be considered.
If you are looking for cash for future deals, you may not need to look further than your existing portfolio. Cash out refinances were an easy way to pull equity out of your properties last decade, but have since become much more difficult. In addition to increased credit score and equity standards, the manner in which many of these loans were underwritten were much stricter as well. Lenders have slowly started to roll out looser cash out loan standards that may be viable refinance options. If you have equity and qualify, you can pull it out at a low fixed interest rate. Even with all the additions to the rate for cash out loans, it is still much lower than any other option you may have available.
We shouldn’t overlook the main reason that owners refinance: for the reduced monthly payment. Comparing what your rate is now with what rate you can get is not a real indicator of how much you will save. When you refinance, you have to add closing costs and property taxes and base your loan amount and payment off of that. The larger the loan amount, the less the rate has to change for you to see it in the payment. A half a point on a $300,000 can equal a few hundred dollars in your pocket. If the savings justify the increase in the term, a refinance may make sense for you.
Before you consider refinancing, you need to know what your long term goals for the property are. Refinancing into a thirty year fixed loan, if you want to sell the property in the next few years, may not be the best option for you. There is no doubt that there are more loan programs for investors now than at any point in the past few years. With interest rates low and more programs available, now is the time to explore whether or not a refinance is for you.