When To Consider Refinancing A Property
By Paul Esajian on December 27, 2019
Every property in your real estate portfolio is different. Even if you have multiple rentals in the same market you need to look at them individually. No two properties will produce the same monthly cash flow, with the same expenses at the same repayment terms. It is a good exercise to evaluate your portfolio at least once every quarter so you know exactly what you are holding. Doing this will give you an idea of whether or not refinancing is in your best interest. A well timed refinance can give you access to equity you didn’t know was available, knock five years off your repayment term or lower your payment a few hundred dollars. Without digging into your portfolio and knowing everything about the repayment schedule and terms you may miss out on a peak window to refinance. Here are four reasons to potentially consider refinancing a property.
- Improve Monthly Cash Flow: There are a number of important factors that should influence your decision to refinance. On the surface if you can lower your interest rate by a half point or more it may seem like a no-brainer. However, you need to take into account the closing costs and prepaid escrow items. These will bump your loan amount and increase your monthly payment. Additionally, you need to know where you stand equity wise. Refinance approval is largely based on your loan to value. Without enough equity you won’t get the rate, and monthly payment, you desire. If those items are in place a refinance can improve your monthly cash flow. The higher the loan balance the less the adjustment in rate needed to have an impact on the payment. On a loan of a half million dollars going from 6% to 5% can save you hundreds of dollars every month, even with factoring in the closing costs. This will help you maximize cash flow on the property and improve your monthly bottom line.
- Reduce Term: The major drawback with most refinances are the additional years added to the mortgage. If you have say 24 years remaining on the loan term you have to weigh the benefit of a reduced monthly payment with adding six years on a 30 year term. In some cases the payment reduction is enough to justify stretching out the term. As great as lowering the monthly payment may be, it is not the only reason to consider a refinance. There are times when you may want to use it as a way to reduce your loan term. Adding an extra payment every year is great in theory, but is something not easily practiced. If you are forced to make the payment every month you will do so. Getting out of a 30 year term with 23 years remaining into a 15 year loan will increase your monthly payment, but also knock eight years from your term. Wiping these years away will literally save you tens of thousands of dollars and get you that much closer to owning the property free and clear.
- Cash Out: If you have equity there are a few different ways to tap into it. The most common is to add a new second mortgage behind your existing first lien with a home equity line of credit (HELOC). However, HELOC’s are not as easy to obtain as you may think, especially for investment properties. Many lenders will not even offer HELOC’s to investment properties. If they do they are restricted as to the loan to value and credit score needed. A cash out refinance may be the best, and only, way to take equity from your property. With a cash out you increase the amount of the loan with the cash out you desire. Your monthly payment will increase but you will get a check with your funds at the closing table. You don’t have to worry about your payment increasing and can use the money any way you like immediately.
- Fix Rate: Most of the adjustable rate mortgages offered today are long term in nature. Instead of a two or three year fixed they are seven and ten years out. If you have an ARM you can opt to see where the monthly payment goes after the adjustment, or you can try to refinance into a fixed rate. Nobody knows when the market will turn and if it does where it will go. Even though the adjustment with an ARM doesn’t seem too bad now, if the market changes it can have a significant impact on your monthly payment. If you are looking for peace of mind you are better off locking in a rate today to avoid the risk of it changing when you loan adjusts.
Refinancing is something that every investor should at least consider a few times during the year. Even if you don’t act, you should know your estimated property value, where interest rates are and what your credit score is. A well timed refinance can not only improve cash flow, but give you access to capital to help grow your business.