Many landlords find themselves in the same boat at some point in their investing careers: considering when to refinance.
Refinancing is an investing strategy that can help you expand your portfolio, access your home equity, or improve your existing properties.
However, it also comes with some risks. What will happen to your investment property and loans? How do you know whether it’s a good time to refinance your loan?
There are a variety of reasons why you may decide to refinance. For instance, maybe you’re looking for lower interest rates, you want to renegotiate the terms of the loan (and get rid of personal mortgage insurance), or simply achieve better financing to fund new goals.
Whatever your reason, by choosing to refinance strategically, you can make the most out of your decision. Here are the best times to refinance your rental property.
Your Property’s Value is High
Refinancing is the process of replacing your current mortgage loan with a new, better one.
The more equity you’ve built in your property, the more attractive you become as a borrower. Logically, if you’ve paid off a higher percentage of your debt, your lender has a greater incentive to loan to you. Traditionally, borrowers with at least 20% equity in their properties are more likely to successfully refinance.
Lenders also look for a low Loan-To-Value (LTV) ratio, or the comparison between your remaining mortgage loan and your property’s appraised value. An 80% LTV is typically low enough to refinance a rental property.
Another way to increase your property’s value is to improve it. If you’ve invested your time and money into improving your property, refinancing is a good way to capitalize on this value added. This concept is also an element of the BRRRR method real estate, or buy, rehab, rent, refinance, repeat. The idea is that after buying a low value property and rehabbing it to rent it at a higher rate, you can get a higher appraisal for refinancing.
Interest Rates Are Low
The national interest rate is established by the Federal Reserve. When the Fed decreases the target interest rate, banks will adjust their interest rates accordingly, passing the change along to affect businesses and mortgage holders.
When this process results in low interest rates, it’s typically a good time to refinance.
Why? Because you’re much more likely to achieve a lower interest rate than the one you got on your original loan. This makes the cost of borrowing low and means you’ll dedicate less funds toward your mortgage each month.
You’ve Become a Less Risky Borrower
Another good time to refinance is when you’ve become a less risky borrower in the eyes of the bank or lender.
For instance, if your investment was originally seen as risky, you may have been subject to a high interest rate to compensate for this risk. You may also have been required to purchase personal mortgage interest (PMI).
If you can prove that this extra expense isn’t necessary anymore, you’ll achieve a much better loan. How can you do this? By demonstrating that you successfully developed stable rental income, have been making consistent mortgage payments, and have an overall healthy debt-to-income ratio.
You Have an Adjustable Mortgage
If your original loan was an adjustable-rate mortgage, switching to a fixed-term is always preferable, if possible.
Adjustable-rate loans leave the door open for annual percentage rate (APR) increases. You don’t want a variable cost of borrowing in your equation.
Fixed-rate mortgages are much more reliable and better for most landlords. A fixed rate of interest helps you make more precise calculations over greater periods of time so you can have a better idea of the long-term trajectory of your rentals.
Refinancing your property is a big step in your property investment journey. It could introduce more debt or risk, but done strategically, refinancing can save you hundreds of dollars on your mortgage each year.. By waiting for one of the above ideal circumstances, you can make refinancing work in your favor.