This is still a great time to refinance investment property. here’s why


The repayment costs depend on the terms of the loan

Let’s say an investor has a loan of $ 250,000 over fifteen years at an interest rate of four percent. She will have a monthly payment of $ 1,849. With a thirty-year loan, she will have a monthly payment of $ 1,194. The monthly payment at fifteen years is 55% higher than that of thirty years for the same amount at the same rate.

In return for the lower monthly payments on a thirty-year loan, a borrower pays significantly more interest. Using the same example of a $ 250,000 mortgage at four percent, on a thirty-year loan, she would pay $ 179,674 in interest at the end of the loan, 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 principal, for a total of $ 332,860. Assuming the same four percent rate, that’s only about 46 percent of interest with a 15-year loan compared to what she would pay over a 30-year term.

Another investor, who wants to keep monthly payments as low as possible, could extend the term of their loan, swapping the lower payments for more long-term interest. Yet another, faced with changing monthly payments due to fluctuating interest rates on a variable rate mortgage, might opt ​​for a fixed rate mortgage to have more predictable monthly costs.

But that’s not all good news. One downside to refinancing to keep in mind is the closing costs. Be prepared to pay for setup fees, appraisal fees, and title insurance fees, among other costs. Total closing costs can range from two to six percent of your loan amount, so for a mortgage of $ 250,000, a borrower can expect to pay between $ 5,000 and $ 15,000.

Cash-out refinancing allows investors to expand their portfolios

Home values ​​are rising and mortgage rates are falling, which is a perfect formula for investors to take advantage of the increased value of their homes to expand their portfolio or to make improvements to properties they already own. . If they have enough equity, they can do this through cash refinancing.

The principle is quite simple: an investor with a mortgage takes a new loan for a higher amount, repays the existing loan and leaves with the balance in cash. The investor can use these funds to improve a property, such as adding an addition to a home, finishing a basement and renting it out separately, upgrading an HVAC system, or replacing aging cabinets and floors. These measures can allow him 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 by putting down a down payment on a new property.

But there are obstacles in obtaining these loans.

First, it is more difficult to qualify. The investor should have more than twenty-five percent of their home equity as well as good credit, usually a score of 680 or more, but preferably 740 or more. It will also need to demonstrate cash reserves, typically up to one year of payments, on the refinanced property. In addition, if it has loan balances on properties outside of its residence and the property being refinanced, it will need to have reserves equal to six percent of the outstanding balance. Finally, there is a six month waiting period to refinance after the initial loan closes.

To determine borrower eligibility, lenders use the “loan-to-value” ratio, or LTV, which is determined by the amount of the loan relative to the value of the home. If an investor has a $ 90,000 mortgage on a home worth $ 100,000, for example, the LTV is 90% because the loan is 90% of the value.

Fannie Mae and Freddie Mac guidelines may state LTVs of seventy to seventy-five percent. These may be too strict for some investors looking for cash refinancing. Some lenders have more lenient standards, especially after the agency that regulates them placed a stricter cap on the number of investment mortgages they can buy.

What Should Investors Know Before Refinancing?

Borrowers must be realistic. In any environment, they need to know what their property is worth, and they need to be aware of their credit status, to avoid any surprises. Banks will order an appraisal to confirm the value of a property.

Changes in income status brought about by the Covid-19 pandemic may also affect the loans they are eligible for.

“Anyone who is self-employed or self-employed should speak to their credit counselor to make sure they are still eligible,” says Sonia Eckard, credit counselor at Mynd. “There are a lot of temporary policy changes due to the Covid disruptions. Maybe they don’t qualify based on their tax returns if they are self-employed or if they earn a commission based on sales. “

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