Being able to pay off your mortgage feels good. Watching OTHERS pay off your mortgage is even better. That’s why refinance rental property is worth it. This, and a dozen other benefits — in our guide.
Whatever people say — the life of a landlord is not always easy. Of course, those who rent out dozens of properties can’t really whine that much, but some people rent out their second homes or condos simply because they need someone else to pay their mortgage off and can’t afford to do it all alone. If you’re one of the landlords that would really appreciate some extra income — you can easily refinance a rental property.
What Does Refinancing Rental Property Even Means?
In short — you get a new mortgage on the same property, with a better interest rate or a shorter term length. If you’re thinking, “Why would I pay someone else’s mortgage off instead of doing it myself?” — then read on. It’s THAT simple, but there are many myths connected to refinancing a rental property. Sticking to them can result in serious problems.
Reasons to Refinance Rental Property.
There are many — to say the least. If you do things right, as the result you can get:
- Better Interest Rate. If you decide to refinance a rental property, the chances are great the new lender may give you a better interest rate. Getting a lower rate is really helpful if you need to lower your monthly payments;
- New Payment Plan. A new lender may shorten the term of your mortgage, making the whole process of amortization of your investment shorter. This is a great way to control your amortization period;
- Possibility to Get a Mortgage on a Financed Property. If you want to buy another property with a mortgage on it, you will need to get new financing first. If you decide on refinancing rental property — you can use the money from refinancing for this purpose as well;
- Extra Cash Flow. Since the new financing is cheaper, you can invest this cash flow back into your rental property. Also, a new lender may extend your amortization period. This is really helpful when you have the need to buy a car or pay off a mortgage;
- Possibility to Get a Better Lender. If you can — get a lender that offers special landlord and/or rental property loans. They usually offer lower rates and give you more time to pay off the mortgage.
All of the reasons above are, of course, real, but those are the reasons for the process. There’s one more thing to consider here.
REAL Reason to Refinance Rental Property
You also have to keep in mind another tiny benefit: maximizing your profit and covering the hidden expenses. We’re talking about little things that people rarely think of when it comes to renting out a property. Some minor, but significant things, like:
- Rental tax;
- Annual refreshment of the property;
- Emergency repairs;
- Property management.
All these little things are usually paid out of your pocket. If refinancing your property can pay for them instead — why would you NOT go for it?
Stages of the Process
Ok, since you know WHY it’s worth it — now let’s talk about HOW you can do it. We’ll separate the whole process into simple steps.
Step 1: Look at your financial situation
Are you in a position to get your rental property refinanced? You need to look at:
- Loan-to-Value — as small as it gets. You get LTV by dividing the loan balance by the property price. if it’s above 75% — maybe refinancing is not the best option at the moment. You need to keep the LTV ratio low;
- DTI — again, as low as it gets, but 40% is the universal standard point. Anything over 40% means that you’re in some hardcore debt, and anything under 40% means that you’re in relatively good financial health (aka you make more than you have to pay);
- Credit score — as high as you can. Your credit score means the world to your future lender. All the good and bad things, all the poor financial decisions (and good things as well) are measured in a complex formula, and you get a 3-digit number. In order to refinance rental property, you need a high credit score, usually in the upper 600s. 650 will be questionable, 700 will be considered just good, and anything over it will be perfect.
Step 2: Get and refresh your papers
What can you improve and what can you put away? Maybe some documents are outdated? Or maybe your new job will give you a letter of employment and proof of income that will be worth more in the eyes of a mortgage underwriter?
- Consider collecting the following documents:
- Letter of employment;
- Proof of income;
- Recent pay stubs;
- Bank statements;
- Proof of insurance;
- Everything you can get to back your assets;
- Recent credit score report;
- Copy of your tax return.
The final list of documents will depend on your lender, but these are the vital basics.
Step 3: Find a potential lender
If all goes well, you can find a new lender that will offer you the best terms on your refinance for rental property. You can go to a bank that you already use, or you can check out online lenders. Also, don’t forget about real estate companies that offer mortgage refinance for commercial properties. Whichever way you choose — just keep in mind the criteria we talked about above:
- Better Interest Rate;
- New Payment Plan;
- Possibility to Get a Mortgage on a Financed Property; and
- Extra Cash Flow.
While it seems to be obvious, you should NOT get distracted by additional options and maybe extra benefits in other directions that the vast majority of lenders will try to sell you. Focus on your initial targets.
Step 4: Do it!
What else can we say? Be sure to contact your lender right away, fill out the forms they ask you to fill, and all that. Lenders will be able to tell you in more detail what’s next, the process may vary from bank to bank.
Before you book an appointment with a representative (if we’re talking about a huge property), make a call or fill an online form — make sure that you’re doing THE RIGHT thing (for you) with THE RIGHT lender. It’s hard to back out of the process even in the beginning, so double-questioning things while you still can is extremely important.
We hope that this short guide can be of some use to you, and we wish you luck in turning your rental property into a profitable asset. Whatever the circumstances, be sure to follow all the steps mentioned above. If things go wrong, there’s a lot of money at stake — it’s best to make sure that everything will turn out way better than you thought it would.