Refinancing a rental property is common practice in the Sunshine State. This move is helpful when the investment isn’t yielding as much profit as expected or when there’s an opportunity to save on mortgage interest.
In Florida, seeking hard money lending might be less complicated than dealing with a traditional lender, but don’t refinance too quickly. While it’s fashionable and attractive, this type of loan is not for everybody and can backfire on you. If you’re not careful, you can lose your asset and a major stream of income.
To make sure that refinancing your rental property makes sense in your situation and is worth pursuing, ask yourself these important questions first:
When Will I Break Even?
Saving money by acquiring a lower interest rate is one of the few justifications to take out a new loan to pay off your existing one. If your current mortgage rates are significantly lower than what you’re paying now, refinancing can be a viable option.
This deal doesn’t necessarily mean that your mortgage payments will decrease. If you’re planning to keep the property over the long haul, you can switch from a 30-year loan to a 15-year one to snag much lower interest. This decision can increase your monthly payments but lower the overall cost of borrowing if you examine the big picture.
The problem with a term-and-rate refinance, however, is that it doesn’t pay dividends immediately. Considering that closing costs are part of the mix, you need to do the math to determine when exactly you’ll start saving dollars. Some inexperienced investors forget to factor in the break-even point and end up losing money overall.
How Much Equity in My Rental Property Do I Have?
If you’re hoping to gain cold cash from the deal, make sure that the property in question has about 30% to 40% equity in it. After all, lenders tend to be more conservative when having non-owner occupied properties as collateral. An investor is a riskier borrower because he or she doesn’t use the rental property as a primary residence.
To make up for the greater risk, lenders have stricter loan-to-value (LTV) ratio requirements. Generally, they want to see 75% LTV before grant refinancing requests. In other words, you need to own at least 25% of your rental property’s value in order to get your mortgage application approved.
Where Will I Use the Cash?
Don’t apply for a cash-out refinance a solid plan on where to spend the money. This type of mortgage erases some or all of the equity that you’ve build on the property over the years. Without using the funds to acquire more assets, turning your rental property into an ATM might be a mistake. Since real estate isn’t always a lucrative business, you might lose your collateral for nothing. Many savvy investors use proceeds from the cash-out on home improvements or new property purchases.
Refinancing is a useful option but only to those that know how to use it to good effect. If you already have a competitive interest rate and receive great rental income, you might want to hold on to your mortgage for now.