Many real estate investors proudly take advantage of financial leverage, borrowing as much money as possible to finance their property purchases. This is typically an advantageous move, giving them access to more purchasing power without much effort or sacrifice required – at the cost of making monthly mortgage payments for the next 15 to 30 years.
Mortgages come in many varieties. Interest rates fluctuate from month to month. Providers have different policies. Terms vary. And the differences between a fixed and variable interest rate mortgage can lead two otherwise similar homeowners to very different financial outcomes.
Sometimes, you get stuck with a “bad” mortgage on a rental property. But there’s good news: with a mortgage refinance, you may be able to secure a much better financial position.
Mortgage refinancing is the process of closing out your old mortgage on a property and starting a new mortgage with new variables, often from a new lender.
For example, let’s say you have a mortgage with an interest rate of 6 percent and an outstanding principal of $300,000. Interest rates have dropped since you took out this mortgage, so you take out a new mortgage from a new lender at an interest rate of 4 percent; you pay off the $300,000 principal associated with the old mortgage using funds from the new lender, and you start making monthly mortgage payments to the new lender.
This financial move can be incredibly powerful, if you know how to use it in your favor.
Why should you consider refinancing a rental property?
Most real estate investors consider refinancing for one or more of the following motivations:
Do keep in mind that refinancing a rental property isn’t always worth it. Refinancing is associated with a variety of fees, including loan origination fees, so it’s on you to crunch the numbers and determine if your savings are going to be worth the upfront costs.
Also, there’s a chance you won’t qualify for a new mortgage. Some banks will not refinance a loan under a certain principal threshold – and some may reject you on the basis of your credit score, income, or other variables.
If you’re interested in refinancing, the process usually goes like this:
So is refinancing a rental property worth it?
That entirely depends on your unique circumstances. If your current mortgage isn’t favorable, if you owe a lot of money, or if current mortgage rates and dynamics are favorable, you should definitely consider refinancing. However, you’ll need to analyze all the numbers to figure out, objectively, whether this move is worth the expense and hassle.
Managing rental properties is difficult work. In addition to taking care of tenants, handling maintenance, and dealing with urgent repair requests, you’ll be facing challenging financial decisions – like whether or not refinancing is worth it.
With the help of a dedicated Houston property management company, everything becomes much easier – so if you’re looking for a partner to assist you and guide you in your property management journey, contact Green Residential today!