Under certain conditions, property refinancing can be a smart financial move that pays off in the long run. But under other conditions, it could actually hurt you.
Home refinancing is a confusing topic for many property investors, since it’s not blatantly obvious how the process works or what you can get out of it. People get confused about whether home refinancing is truly beneficial, the length of time required to refinance, and how to find the right investment home loan provider.
Not all of these concepts are easy to address, because every property investor is in a unique situation. However, there are some fundamentals that can help you understand the basics of home refinancing—and whether it’s the right financial move for you.
What Is Home Refinancing?
Home refinancing is the process of taking out a new loan on a property, oftentimes with a new loan provider. To do this, you’ll take out the new loan, pay off and close out the old loan, and resume monthly mortgage payments to the new provider.
Because you’ll be starting a home loan from scratch, you’ll have a chance to work with your new credit score, you’ll set new terms for the loan, and you’ll likely have more equity to work with. The process itself can take a few weeks to a few months, depending on the complexity of the deal and your financial situation.
Why Do People Refinance an Investment Property?
So why do some people pursue home refinancing?
There are many possible renovations, all of which depend on your ability to pay off your old loan and initiate a new one:
- Get a lower interest rate. One of the most obvious reasons to refinance is getting a lower interest rate. If you got a mortgage at a rate of 4.5 percent, and you can now get a loan at just 3.5 percent, you could save 1.0 percent interest per year; if you have a principal of $100,000, that amounts to $1,000 per year! If interest rates are significantly lower, it often makes sense to switch and start making more on your investment.
- Change from a variable interest rate to a fixed interest rate. Variable rates often seem attractive at first, but they can hurt you in the long run if they fluctuate. Most property investors are better off with a fixed rate mortgage, which is much more stable and predictable. This is your chance to switch to a fixed rate loan.
- Change the terms of your loan from 15 to 30 years. Some people like the idea of paying off the property faster, but they don’t have the cash flow to support this decision. Refinancing could help you shift from a 15-year term to a 30-year one.
- Change the terms of your loan from 30 to 15 years. Conversely, if you’re in a better financial position and you want to pay the loan off faster, you could switch from 30-year terms to 15-year terms.
- Fund property renovations or repairs. Depending on how you structure the loan, you could free up cash, which you could use to fund a major home renovation or initiate a repair, allowing you to attract better tenants or charge more in rent.
- Tap into the equity in your property. You may also want to tap into the equity in your home you’ve already established, freeing up cash to use for any number of things, such as investing in another property.
- Consolidate other debts. Some people roll other debts into their mortgage, using refinancing as a way to consolidate debt.
If you can take advantage of any of these benefits, home refinancing may be right for you.
How Do You Initiate Refinancing?
If you’re speculating that home refinancing could be a wise financial move in your situation, one of the first things you need to do is research. What are the current investment property loan interest rates available, and what kinds of terms can you get from different providers in your area? Crunch the numbers using mortgage calculators; are you able to save money long-term under these new conditions? Make sure you look at different providers so you can find the best possible deal.
If you feel confident a provider can offer you a good deal on an investment property refinancing loan, you’ll need to provide them with a number of documents. Each provider will have different requirements, but you can usually count on needing to provide recent proof of income, your tax documents from the previous year, a letter from your employer, multiple forms of personal ID, and other financial documents and statements. It’s very similar to what you provided for your original mortgage.
Refinancing isn’t the right strategy for everybody. In some cases, it can actively work against you. However, there are millions of people who could greatly benefit from home refinancing right now—and they might not even know it. Under the right conditions, you could end up saving thousands of dollars.