Last Updated on: 11th January 2023, 09:25 am
For rental property owners that wanna continue buying more property through refinancing, the first thing to think about when doing so is the type of refinancing you should get and what you are looking to do with it.
It’s either gonna be for a property that you’d be keeping for a long period of time or for a property that you just wanted to fix up and sell for profits.
In this post, we’re gonna have to dive into discussing the different types of refinancing that is best for a specific type of property. We’ll also include some of the risks that are involved in them.
But before anything else, if you haven’t got a bit clue about what a mortgage refinance is, please read this post first: Mortgage Refinance
Also, keep in mind that for the sake of simplicity, we only included those that you’d actually need and excluded the rest that doesn’t make sense in real estate investing.
Let’s get straight to what you came here for…
Here’s a list of Types of Refinance for Real Estate Investment Properties
1. Rate and Term Refinance: Best for lowering the interest rate on your existing loan.
For example, let’s say an investor has a 30-year fixed-rate mortgage with an interest rate of 4.5% on a property worth $200,000. If the investor refinances to a new 30-year fixed-rate mortgage with an interest rate of 3.5%, their monthly mortgage payment would drop from $1,013 to $865, a savings of $148 per month. Over the life of the loan, the total interest paid would drop from $164,857 to $127,617, a savings of $37,240.
- Perfect if you want to lower the interest rate on your existing loan.
- There is no risk because no additional cash is being taken out.
- The lender may require a property appraisal and additional documentation.
- Lenders may not be able to refinance at a lower rate if your property has appreciated in value.
2. Cash-Out Refinance: Best for investors who wanted to take out a new loan by leveraging the equity built up in your property. In other words, this is taking the money out of your home equity.
- Access to 80% value funds of your existing property to purchase additional investment properties or to pay off personal debts.
- Best for investors who have at least 20% equity in their properties.
- Has higher interest rates and fees.
- High risk of property foreclosure if the investment doesn’t perform as expected.
Note that your refinance can be a combination of both rate and term refinance and cash-out refinance. This means that you can negotiate to have a lower interest rate on their existing loan while also taking out some cash. This isn’t always the case for all lenders though.
3. Home Improvement Refinance: Perfect for investors that just to increase the value of their home through repairs or upgrades without worrying about overborrowing. Home Improvement Refinance is typically used to pay for materials and labor costs associated with the home improvement project.
- Can fund home improvement projects that will increase the value of your home.
- Can potentially reduce your monthly mortgage payment if you happen to refinance at a time when the time interest rate is lower.
- Requires you to go through the mortgage process again, including paying closing costs.
- This may result in a longer loan term, which means you will be paying the loan longer than you already have been.
Knowing that you can use the money from a cash-out refinance to make home improvements, what is the purpose of a home improvement refinance?
Let’s answer this…
How is a cash-out refinance different from a home improvement refinance?
The main difference between home improvement refinance and cash-out refinance comes down to the amount of money you can borrow. With a home improvement refinance, you’re only able to borrow a smaller amount of money that’s enough to meet the specific budget intended for your home improvement projects. With a cash-out refinance, you can borrow a larger amount of money because the loan is not restricted to a specific purpose.
I hope this clears out your confusion about the differences between the types of mortgage refinances that make sense for real estate investing.
But where do you actually go to refinance your mortgage?
Here are the reputable lenders to use when refinancing your home.
- National Banks and Regional Banks such as Ally Bank, Axos Bank, PNC Bank, JP Morgan Chase, U.S. Bank, Wells Fargo, Bank of America, and Capital One.
2. Credit Union
3. Mortgage Companies
4. Online lenders: Easier to apply for and may have faster turnaround times than traditional lenders.
Now … If you are thinking about refinancing your mortgage, don’t forget to consider the type of refinancing that best suits your financial goals and the type of property that will benefit most from that particular refinance option.
What kind of properties can you refinance?
Types of properties that are best for a cash-out refinance and rate and term refinance:
- Single-family homes
- Multi-family homes (e.g., duplexes, triplexes, etc.)
- Vacation homes
Note that when you’re doing a refinance, remember to always carefully consider doing the following things before making any decisions.
Here are some of the tips and strategies to do before doing a refinance including the things that you need to avoid:
- Don’t rush into a refinance without doing your homework: Take the time to research and compare interest rates. Also, make sure you understand all the terms and conditions of the loan, this includes fees or closing costs associated with them.
- To shop around: Try to compare rates and terms from multiple lenders in order to find the best refinance deal. Don’t just settle for the first offer you receive.
- To consider your long-term goals: Think about your long-term investment goals and how refinancing will impact them. But if you plan to sell the property in the near future, it may not be a good idea to refinance if the fees and closing costs will outweigh the benefits.
- To seek professional advice (mortgage brokers): If you’re unsure which refinance option is best for you, it might be helpful to speak with a financial professional. A mortgage broker or financial advisor can help you understand your options and recommend the one that best suits your specific needs and goals.
- Avoid taking on too much debt: If you’re considering a cash-out refinance, be careful not to take out too much cash without planning ahead what you’re gonna do with it
- Consider the length of the loan: Going for a 15-year loan will make your payments a bit higher than going for a 20 or 30-year loan.
The general strategy here is: every time you refinance a property, make sure to go for the safest longest-term payment possible to give yourself more flexibility going forward in the future.
Recommended Mortgage Brokers Here: List of Mortage Brokers
How is a long-term payment mortgage loan better than short term?
A long-term mortgage loan typically has a lower monthly payment than a short-term loan. This is because the loan is spread out over a longer period of time, so each payment will just be a smaller portion of the total loan amount.
How many times can you refinance your home to the same lender?
It might depend on who your lender is, but typically once you reach about 8-10 property mortgages from the same lender, they’ll start to cut you off and you can’t get anymore.