Are you a rental property owner looking to improve your cash flow and access equity? Refinancing your rental property may be the solution you’re looking for. In this blog post, we will cover everything you need to know about refinancing rental property, including the different types of refinancing and tips for maximizing your returns.
Types of Refinancing
Refinancing rental property can be a great way to improve cash flow and access equity, but it’s important to understand the different types of refinancing and their costs. There are several flavors of refinancing: cash out refinancing, cash in refinance, rate and term refinance, and recasting. Let’s take a closer look at each type.
Cash Out Refinancing
Cash out refinancing is a popular option for accessing equity in your rental property. With a cash out refinance, you take out a new loan that is larger than your existing mortgage. The difference between the two loans is then given to you in cash at closing. This cash can be used for any purpose, including investing in another property or making improvements to your current rental.
One thing to keep in mind with cash out refinancing is that it typically comes with a higher interest rate than a standard rate and term refinance. Additionally, you will need to pay closing costs on the new loan, which can add up to thousands of dollars. However, if you have a significant amount of equity in your property and a solid plan for the cash you will receive, a cash out refinance can be a powerful tool for growing your real estate portfolio.
It’s important to note that there are limits to how much cash you can take out in a cash out refinance. The maximum loan-to-value ratio (LTV) varies depending on the type of property and your lender’s policies. For example, if you have a single-family home and you’re doing a cash out refinance, you can typically go up to 80% LTV for fixed rate mortgages and adjustable rate mortgages. However, if you have an investment property with one to four units, the maximum LTV is usually 75%.
Overall, cash out refinancing is a viable option for accessing equity in your rental property. However, it’s important to carefully consider the costs and risks involved before proceeding. Work with a trusted lender and run the numbers to determine if a cash out refinance is the right choice for your investment goals.
Cash In Refinance
While cash out refinancing involves taking money out of your property, cash in refinancing involves adding money to your property. This might seem counterintuitive, but there are several situations where it can be a smart move for real estate investors.
One reason to consider a cash in refinance is to improve your loan-to-value (LTV) ratio. When you have a higher LTV, you are considered a higher risk borrower and may be charged a higher interest rate on your mortgage. However, by adding cash to your property and lowering your LTV, you may be able to qualify for a lower interest rate on your mortgage. This can save you thousands of dollars in interest payments over the life of your loan.
Another benefit of cash in refinancing is that it can help you eliminate private mortgage insurance (PMI). PMI is typically required when your LTV is above 80%, and it can add hundreds of dollars to your monthly mortgage payment. By adding cash to your property and lowering your LTV, you may be able to eliminate PMI and lower your monthly payment.
In order to do a cash in refinance, you will need to have cash available to put towards your property. This might come from savings, the sale of another property, or a loan from a private lender. It’s important to carefully consider the costs and benefits of a cash in refinance before proceeding, and to work with a trusted lender to ensure that you are making a smart financial decision.
Overall, a cash in refinance can be a powerful tool for real estate investors who are looking to improve their loan terms and save money on interest and PMI payments. If you have cash available and are considering a refinance, it’s worth exploring whether a cash in refinance could be the right choice for you.
Rate and Term Refinance
A rate and term refinance is a type of refinancing that allows you to change the interest rate and/or terms of your existing mortgage without taking out any additional cash. This can be a helpful option if interest rates have dropped since you took out your original mortgage, as it allows you to lock in a lower rate and potentially save money on interest payments over the life of your loan.
Another benefit of a rate and term refinance is that it allows you to extend the term of your loan, which can lower your monthly payment and therefore improve cash flow. This can be particularly helpful if you are struggling to keep up with your mortgage payments or if you want to free up cash for other investments.
However, it’s important to keep in mind that extending the term of your loan can also increase the total amount of interest you will pay over the life of your loan. Additionally, there may be closing costs associated with a rate and term refinance, so it’s important to carefully consider the costs and benefits before proceeding.
If you are considering a rate and term refinance, it’s important to work with a trusted lender who can help you evaluate your options and make the best decision for your financial goals.
Recasting
Recasting is a lesser-known form of refinancing that can be a great option for real estate investors who want to improve their cash flow without taking on additional debt. With recasting, you make a lump sum payment towards your mortgage, which reduces your principal balance. Your lender then recalculates your monthly payment based on the new, lower balance. This can result in a lower monthly payment and improved cash flow, without the cost and complexity of a full refinance.
One of the key benefits of recasting is that it can be done without incurring closing costs or extending the term of your loan. This makes it a great option for investors who want to improve their cash flow without taking on additional debt or stretching out their mortgage payments.
It’s important to note that not all lenders offer recasting, and the terms and conditions can vary widely. Some lenders may require a minimum lump sum payment, while others may charge a fee for the service. Additionally, recasting may not be an option for all types of loans, such as FHA and VA loans.
If you are interested in recasting your loan, it’s important to talk to your lender to see if it’s an option and to understand the costs and benefits involved. In some cases, recasting may be a better option than a full refinance, especially if you want to improve your cash flow without taking on additional debt or extending the term of your loan.
Overall, recasting is a powerful tool for real estate investors who want to improve their cash flow and reduce their monthly mortgage payments. While it may not be as well-known as other forms of refinancing, recasting can be a great option for investors who want to improve their financial position without incurring additional debt or costs.
General Tips for Refinancing
Refinancing a rental property can be a great way to improve cash flow and access equity, but it’s important to approach the process with a solid plan and understanding of the general tips and guidelines.
First, be aware that a new appraisal is likely required when refinancing, and there is an increased likelihood for a cash out refinance to require an appraisal. This means you should be prepared to pay for an appraisal and factor that cost into your decision-making process.
However, most refinances will allow you to roll in closing costs, appraisal costs, and even a certain amount of rate buy down into the new loan balance. This can be a great way to reduce out-of-pocket expenses and make the process smoother.
It’s also important to check with your lender for any restrictions or limitations they may have on refinancing, such as the maximum number of conventional financing options available for rental properties. Currently, the limit is 10, but it is always best to confirm with your lender.
Remember to be flexible in your approach and consider voluntarily putting more money into the deal if it is advantageous for your situation. This may be necessary to improve your loan-to-value ratio or eliminate private mortgage insurance and can have long-term benefits for your rental property investment.
Finally, always check with your lender for their current rules and regulations to ensure you are making the best decision for your rental property. They can provide valuable insights and advice to help you make an informed decision and achieve your investment goals.
By keeping these general tips in mind and working closely with your lender, you can take advantage of the benefits of refinancing and improve the financial position of your rental property investment.
Tips for Rate and Term Refi
When considering a rate and term refinance on a rental property, it is crucial to understand what it entails and how it can impact your investment goals. A rate and term refinance allows you to change the current mortgage interest rate to whatever the current rates are and the current term of the loan, which could be 30 years or 15 years. This can sometimes mean just resetting the loan back to the original term. Essentially, a rate and term refinance is a way to replace your existing mortgage with a new one that has a lower interest rate, which can save you money on your monthly mortgage payments and interest costs over the life of the loan.
One of the critical benefits of a rate and term refinance is that it can often improve cash flow in falling interest rate environments. When interest rates drop, refinancing can allow you to reduce your interest rate and extend your loan term, which can lower your monthly payment and free up cash flow. Additionally, if you have paid down a significant amount on your loan, you may be able to refinance into a shorter loan term, which can also help improve cash flow.
It is essential to keep in mind that when doing a rate and term refinance, you keep the same balance (“Limited Cash-Out Refinance” in table), and Fannie Mae governs the functions of cash-out refinances. With a limited cash-out refinance, you can pocket $2,000 or 2% of the new loan balance, whichever is less. However, the new loan balance will be higher than the original because of the funds disbursed and any closing costs not paid upfront.
Moreover, it is critical to note that there is a maximum loan-to-value (LTV) ratio when doing a rate and term refinance. For a rental property, the maximum LTV is 75%. This means that you can go up to 75% loan to value and leave 25% in the deal. It is also important to realize that a rate and term refinance can be a way to change your loan type to remove PMI or mortgage insurance premium for FHA loans.
In conclusion, a rate and term refinance can be a useful tool for real estate investors looking to improve cash flow and save money on interest costs. However, it is crucial to evaluate the costs and benefits of refinancing and work with a trusted lender to ensure that you are making the best decision for your investment goals. By understanding the process and guidelines for a rate and term refinance, you can take advantage of the benefits of refinancing and maximize your rental property investment’s financial position.
Tips for Cash Out Refi
When it comes to refinancing a rental property, a cash out refinance can be a powerful tool for real estate investors looking to access equity and improve cash flow. However, it’s important to approach the process with a solid plan and understanding of the guidelines and tips for doing a cash out refinance.
First and foremost, it’s crucial to understand that the new loan amount for a cash out refinance will be the previous loan balance plus any cash received at closing. This means that the amount of cash you receive will depend on the difference between the new loan and the previous loan balance.
While the cash received from a cash out refinance is not typically taxable, it’s always a good idea to talk to a CPA if you plan to use the money for additional investing. They can provide valuable insights and advice to ensure that you are making a smart financial decision.
It’s also important to be aware of the maximum loan-to-value (LTV) ratios for cash out refinancing, as outlined in the table. These ratios can vary depending on the type of property and your lender’s policies. For example, if you have a single-family home and you’re doing a cash out refinance, you can typically go up to 80% LTV for fixed rate mortgages and adjustable rate mortgages. However, if you have an investment property with one to four units, the maximum LTV is usually 75%.
When planning a cash out refinance, it’s important to consider the strategy you’ll be using the funds for. Cash out refinancing is often used for BRRR (Buy, Rehab, Rent, Refinance) strategies, with the goal of getting all the money put into the property back to use for the next investment. However, it’s important to have a clear plan for the cash received and to make sure that the next investment will generate enough cash flow to support the new loan.
Additionally, it’s important to note that most lenders now require seasoning of the property up to 12 months before allowing a cash out refinance. This means that you may need to wait a year after purchasing the rental property before being able to refinance and pull out cash. It’s important to plan ahead and understand all the requirements before deciding to do a cash out refinance on a rental property.
In conclusion, a cash out refinance can be a powerful tool for real estate investors looking to access equity and improve cash flow on a rental property. However, it’s important to carefully consider the guidelines and tips for doing a cash out refinance, including the new loan amount, maximum LTV ratios, and strategy for using the funds. With a solid plan and understanding of the process, a cash out refinance can be a smart financial decision for growing your real estate portfolio.
Tips for Owner-Occupant Refi
Refinancing a rental property as an owner-occupant can be a smart financial decision, provided you follow the rules and guidelines set by your lender.
The first thing to keep in mind is that most lenders require you to live in the property for at least another year after refinancing. This is important to keep in mind because attempting to commit occupancy loan fraud by refinancing and then moving out before the year is up could result in serious consequences. It’s essential to be aware of this rule and follow it to the letter to avoid any legal issues.
Another important consideration is that refinancing as an owner-occupant can be a good way to take advantage of better interest rates or to remove PMI. However, it’s important to check with your lender if you plan to move out before the year is up even if you’re not attempting fraud. Some lenders may have specific requirements that must be met before refinancing, and moving out before the year is up could put you in breach of your loan agreement.
Overall, refinancing a rental property as an owner-occupant can be a great way to improve your financial position and take advantage of better interest rates or other benefits. However, it’s essential to follow the rules and guidelines set by your lender to avoid any legal issues. If you’re considering refinancing as an owner-occupant, it’s a good idea to talk to your lender and make sure you fully understand the requirements and guidelines involved.
Conclusion
In conclusion, refinancing a rental property can be a powerful tool for real estate investors looking to improve cash flow and access equity. With the right approach and understanding of the different types of refinancing, you can make smart decisions that will help you achieve your investment goals. Whether you’re considering a cash out refinance, a rate and term refinance, or a recasting, it’s important to work with a trusted lender and carefully evaluate the costs and benefits before proceeding. Keep these tips in mind, and you’ll be well on your way to maximizing the potential of your rental property investment.
