If you’re still paying a mortgage on your rental property, you know how those payments impact your bottom line. Investing in a rental property is a delicate business with a delicate balance of income against the cost of the property and its upkeep. With that in mind, saving a significant amount of interest through a mortgage refinance is an appealing prospect.
Refinancing your rental property can save you a chunk of money on your monthly payments. However, other factors can impact whether you end up saving any money. Before jumping into refinancing, take a minute to determine what’s best for your specific needs.
Different Types of Refinancing
There are a few different ways you can tweak your mortgage when you refinance. Two of the most common are rate and term refinances. A rate refinance means that you get a new mortgage with a lower interest rate. A term refinance usually means going from a 30 to a 15-year mortgage, or vice versa.
A cash-out refinance is another option for landlords who need to free up more funds. This type of refinancing involves refinancing up to 80 percent of your current home value for cash. This type of loan is harder to qualify for and often comes with a higher interest rate. Still, it can be helpful for landlords seeking to renovate their rentals to make a larger profit from higher rents.
Low Mortgage Rates Make Refinancing Appealing
If you took out your mortgage just a few years ago, chances are you’re paying at least twice the current rates. Though five or six percent was a great deal back then, rates have continued to drop to historic lows. Moreover, Fannie Mae claims that 30-year fixed-rate loans should remain at a 2.7-2.8 percent rate for the rest of 2021. As the economy rebounds from the pandemic, those rates may begin to creep up. However the continuing uncertainty surrounding COVID-19’s variants makes it impossible to know what might come next.
Refinancing is a great way to take advantage of lower interest rates so you can shorten your payment term. Shorter payments terms put you even closer to higher profit margins without the monthly expense of a mortgage. Most borrowers choose to refinance to lower their interest and shorten their payment term or take advantage of turning some of the equity they have earned on their home into cash. With these low interest rates, going from a 30-year to a 15-year mortgage can even shorten your payment timeframe while keeping your payments at about the same rate.
Though you’ll still be making payments for longer, one benefit of sticking with a 30-year mortgage but refinancing at a lower rate is that your monthly expenses can be much lower. This means higher monthly profits and more flexibility in your budget for property improvements or unexpected expenses.
The Drawbacks of Refinancing
One of the most significant drawbacks to refinancing is the cost. You should usually expect to pay between two and five percent of the loan balance in closing costs. Depending on your loan amount, it could be more economical to stick with your current mortgage at its higher rate.
Even if you’ve determined that you’ll still be paying less by refinancing, other factors may still complicate the decision. Before going from a 30 to 15-year mortgage, it’s crucial to find your rental’s break-even point. This is the point at which your gross income is equal to your expenses.
This number is important in budgeting your rental and determines whether you can refinance with a shorter payment term. For more information on calculating your break-even point, you can check out our article on budgeting your property. Once you have that number, you can compare the cost of a 15-year mortgage with lower rates than your current payments and determine whether you can afford the change.
Is Refinancing the Right Option for You?
The decision to refinance requires an in-depth understanding of your investment’s finances as well as a firm grasp of current refinance rates and fees. The key is to understand your own needs and goals, whether to secure more cash on hand, shorten your mortgage term, or reduce your payments. Always discuss your options with a loan officer or mortgage broker before committing. Remember, your decisions now can impact your finances for decades, so it’s essential to proceed with caution.
With so many facets to consider, it’s difficult for landlords to make the right call on refinance. Working with a property manager is a great way to ensure you’re handling your rental’s finances with the utmost care and efficiency. If you own property in the Portland metro area and are wondering whether to refinance your mortgage, Rent Portland Homes by Darla Andrew has the experience to help you make that decision.
Pick the Right Partner
Our goals are twofold: we want to make your property a successful rental, both in terms of profits and the quality of your tenants. We take a look at your rental’s current finances and work with you on creating a goal for increased growth in the future. Our experience in the Portland rental market gives us an edge in marketing properties, setting competitive prices, and ensuring your investment is always handled right. But we also know that running a successful rental involves far more than a reasonable budget. We not only help you find the best tenants, but we also make sure those tenants stay happy with a little help from our guaranteed fast maintenance service. We handle all tenant communications, so you’ll never have to worry about fixing a leaky faucet or badgering your tenant for rental payments.
If you’re ready to take the next step with your rental business, call or text Darla at (503) 515-3170 or fill out the contact form on our website. We look forward to working with you!