While some real estate investors deliberately choose properties and decide on their investment in the context of their financial plan, some "investors" are reluctant landlords who opted to rent out their home rather than sell it when housing values dropped. In 2013, with home values rising and affordable current mortgage rates, it may be time for investors to decide if they want to sell their home or refinance.
The decision to sell or refinance depends a lot on current market conditions and your investment goal. According to the National Association of Realtors' 2013 Investment and Vacation Home Buyers Survey, buyers of investment homes in 2012 planned to hold their property for a median of eight years, up from five years in 2011. The low cost of mortgage financing helps many investors improve their cash flow, so you may want to consider the benefit of a mortgage refinance.
Tips for refinancing an investment property
- Decide how long you're keeping the property. Reducing your mortgage interest rate can improve your bottom line, but make sure you factor in the cost of a home refinance. Get an estimate of your closing costs and make sure you can recoup those costs quickly with your interest savings.
- Check your credit. If you haven't applied for a mortgage loan recently, you may not realize that your credit score must be above 740 to pay the lowest interest rates on a conventional loan. A lender can give you tips to improve your credit.
- Reduce your debt or increase your income. Mortgage lenders typically won't allow your debt-to-income ratio to be higher than 41 or 43 percent. Your rental income may help, but be aware lenders have varied rules on how much of that income they'll count because of the possibility of a vacancy for a month or two.
- Decide on your loan term. While the payments are higher if you switch from a 30-year loan to a 15-year loan, you'll pay off the mortgage faster and pay significantly less interest over the life of the loan with a shorter term. Estimate your payments for different loan terms to see which meets your needs.
- Shop around. Some lenders are more experienced with investors than others, so take the time to talk with a direct lender, a bank and a credit union to see which lender will offer you the best service and rates for your refinance.
- Gather your paperwork. In addition to complete documentation of your income and assets, you'll need a copy of the lease for the property you're refinancing. Lenders must track all your deposits, so keep careful records of all transactions.
- Prepare for your appraisal. An important part of the mortgage refinance process is determining your home equity. Most lenders want you to have 20 to 25 percent or more in equity for an investment property refinance. Try to get your tenants to cooperate with the appraiser. Prepare your investment property for the appraisal to maximize your chances of a higher home value.
If you've decided to keep your investment property for a few years, a mortgage refinance should be part of your financial plan.