Mortgage data from Freddie Mac suggests that, as inflation slows, interest rates will continue to slide back down. And no – we’re not going to see 3% rates any time soon – but that doesn’t mean it’s not worth your while to revisit your existing mortgages! But when should real estate investors look to refinance? And how do they know it’s the right time?
Here’s what you need to know.
Note: there are MORE types of refinancing than these three. However, the others come with loan type, age, or other restrictions that make them less relevant to this conversation. However, before refinancing, we recommend doing your due diligence to uncover all available options and their benefits and drawbacks.
This is the most common type of refinancing. It involves refinancing your existing mortgage to change the interest rate, the loan term, or both without altering the principal balance. Your equity won’t change, nor will the amount you owe. You can use this to reduce the interest rate (and obtain lower monthly payments) or modify the terms to reduce your minimum payment or pay off your mortgage faster.
A cash-out refinance allows you to refinance your mortgage for more than what you currently owe and take the difference in cash. This increases your loan balance but provides you with immediate cash. This is good for investors seeking liquidity from equity, which can be utilized for renovations, debt consolidation, or further investing. However, a cash-out refi may result in higher monthly payments.
This strategy usually comes with a lower interest rate than a personal loan.
You pay a lump sum toward your mortgage principal in a cash-in refinance. Granted, you can always put whatever amount you want towards your mortgage – but it won’t change your monthly payment. This does! It’s like tacking on more to your down payment, which means you can qualify for better terms (like a lower rater) or get rid of private mortgage insurance (PMI).
Buyers who put down less than a 20% downpayment must have private mortgage insurance (PMI). This extra insurance fee is rolled into the mortgage payment each month. PMI protects the lender in case the borrower defaults on the loan. A cash-in refinance can improve your loan-to-value ratio and eliminate the need for PMI. PMI also discontinues when your equity grows sufficiently, but refinancing speeds up the process.
There are risks associated with using refinancing to access cash. While this can be beneficial if you want to make major renovations or expand your portfolio, be careful! This isn’t your only option, either.
Further Reading: Here’s How You Can Access Property Equity WITHOUT Selling
However, if refinancing is advantageous for other reasons besides tapping into existing equity, it may be worthwhile to do.
Most people refinance to take advantage of lower interest rates, thus reducing their monthly mortgage payments. But here’s the question: at what point should you refinance? What percentage change is worth the trouble, fees, and closing costs? The rule of thumb tends to suggest a 2% difference.
But crunch the numbers for yourself – how much of a difference is worth it to you?
Yes, rates may further decrease in the future. That doesn’t matter. What matters is that refinancing makes the difference you need to see. There’s no limit to how many times you can refinance a property, so it’s possible to do so again in the future. Just remember that there are closing costs (2-5%) for each refi and a hard credit inquiry that can impact your credit score. Some lenders also require a “cool down” period between refinancing transactions.
At the end of the day, we recommend consulting with a financial advisor when you’re considering altering your mortgage terms. They can help you explore the alternatives, do the math accurately, and help manage the associated risks. Don’t fall for refinancing FOMO when rates drop later this year. If you choose to refinance, do it because it makes the most sense for you, your portfolio, and your financial goals.
Ready to invest but worried about risk? Let your REI Nation advisor help!