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Refinancing Investment Property: What You Need to Know

Posted by  on Sep 20, 2010
 

Refinance to increase cash flow

With the economy and real estate in the dumps, tenants are demanding and getting lower rent. You may wish to lower your mortgage payment to keep the cash flow positive or at least neutral.

By stretching your current balance over a new loan term, you lower your monthly payments. If for example, you have a $300,000 30-year mortgage you took out five years ago at 6.625 percent, your monthly payment (principal and interest) is $1,921 and your remaining balance is $281,233. If you refinanced that remaining balance for a new 30-year term today at exactly the same rate, your payment would drop to $1,801, a reduction of $120.

It's more likely that you'd get a lower rate today, though. A rate of 5.00 percent, for example, results in a monthly payment of only $1,510. If you stretched it even further by opting for a longer loan term, such as 40 years, your monthly payment drops to $1,356, which is $565 less than your hypothetical current payment.

Finally, you can attach your 40-year term to a hybrid adjustable-rate mortgage like a 5/1, which is fixed for five years. On a primary residence, your rate may be less than 4 percent. On an investment property, add about 0.75 percent to the residential rate. At 4.75 percent and with a 40-year term, your payment becomes $1,310 ($610 lower than your original loan). That drop in your monthly payment can support a fairly large (and hopefully temporary!) rent reduction.

Refinance to save money

Another reason for refinancing an investment property is to accelerate your payoff to pay less interest over the life of the loan, or to conform with your retirement plan. A 50-year-old who wants to retire at age 65 might want to refinance investment property with a 15-year mortgage. Shortening the mortgage term in this example gets you a rate that is typically 0.5 percent lower than a 30-year rate, saving thousands in interest over the term of the loan. Best of all, your loan would be retired just when you stop working, giving you the rental income without the mortgage payment.

Investment property considerations

If the rental you want to refinance was originally purchased (or least refinanced) as a primary residence, you may not be able to improve substantially on the rate. That's because investment property refinances come with some hefty surcharges that you didn't have to pay when the home was your primary residence. When you compare mortgage rates, be sure and tell the mortgage lenders that the property is a rental so you get meaningful mortgage quotes.

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