5 Top Tips to Refinance A Rental Property
Refinancing your rental property is one of the quickest strategies to grow your portfolio and unlock a multitude of wealth-building possibilities. Apart from allowing you to lower your monthly repayments and interest rate, you’ll also benefit from having an additional cashflow.
Before you think of refinancing your rental property, you need to calculate the risks and rewards of doing so. Getting the right timing for your refinancing arrangement can be beneficial in many ways. As a rule of thumb, consider refinancing when your property value is high and the prevailing interest rates are low. And if your credit score is not that good, looking for guarantor loans low APR facilities can be the best option.
Most lenders use ‘loan to value’ (LTV) to determine how much they can give you. For instance, if your property has a value of £100,000, a lender with an 80% LTV will limit their loan to £80,000.
To ensure you get the best outcome when refinancing your property, here are some top tips to guide you.
Pick the Right Timing
Knowing when to refinance your rental property is extremely important. This is because wrong timing could see you ending up with worse loan terms that you had before. When looking at the timing, consider the following:
- Falling interest rates: Check if the prevailing mortgage rates are lower than what you are paying on your current mortgage.
- Better credit score: If your credit score has improved from the time you got assessed for the current mortgage consider refinancing.
- Changing loan terms: If you would like to either extend or shorten your loan term, refinancing can help you out.
- Rising property prices: If your property has increased in value and you would want to make use of your equity, you may consider refinancing your property.
If you have done your homework and seen that you tick all the boxes as far as the timing is concerned, think about the next step-establishing the value of your property.
Determine the Value of Your Rental Property
Look up at the equity you have managed to build on your rental property. Lenders use ‘loan to value’ (LTV) to determine how much you can refinance against your property. Typically, you’ll see most lenders giving themselves a 25% cushion. This means for a property with equity of £150,000, the maximum loan you can get is £112,500. The more equity you have in your rental property, the more skin you have in the game.
Using online websites such as Realtor.com or Zillow.com, you can quickly know the value of your rental property. If your property is the sort that is commonly traded such as small multifamily, single-family home or condo, their onsite rental calculators can help you get a close estimate based on what other similar properties go for in the area.
In case your property is a bit harder to appraise, consider getting a broker’s price opinion from a local realtor. While some lenders may not give your current rent much weight as a dependable metric in evaluating your equity value, you can still prove it to them that it is indeed dependable.
Shop Around for The Best Lender
The first port of call when considering refinancing is your current lender. The advantage of engaging your current lender is that they know you best and may give you a good rate.
Having said that, you must let them know that you will be shopping for other offers elsewhere. Get as many offers as you possibly can from private lenders, online credit brokers or even brick and mortar stores.
With every enquiry, get to know the lender’s loaning criteria and the best rates they can offer you. Also, ask them about their minimum requirements and their refinancing terms. Some of the specific enquiries you should make include:
- The lender’s loan to value requirements
- The minimum credit score they are willing to consider.
- Closing costs and other fees
- The loan processing time
- How long you’ve owned the rental properties.
- Check whether they offer fixed or flexible mortgage rates
One thing you will appreciate is that getting a lender requires a little more effort and time. Therefore, working with licensed credit brokers is recommended. These brokers give you access to a pool of lenders who may match exactly what you are looking for.
Have Your Paperwork Ready
Have your rental property files organised and ready. Some of the documents lenders often ask for include:
- Government-issued identity documents such as an ID card or passport
- Tax returns-These documents show your financial information including your income trends
- Bank statements and pay stubs-These show proof of income and by extension your ability to repay the loan.
- Rental agreements
- Statements of financial position showing the assets you have versus the claim against them to help lenders determine the sufficiency of your collateral
- The property deed
- Social security number
- Mortgage statements
- Rent receipts
Having these documents at hand means that when the lender needs them, you wouldn’t have to scramble looking for them, hence preventing unnecessary delays.
Opt for Cash-Out Refinance
If you want some cash to pay for property improvements or put a down payment on a second property, you can cash-out your home equity. With a cash-out refinance, your current mortgage is replaced by the new loan you are taking with the difference coming to you in form of cash.
This is contrary to the traditional refinancing where you replace the existing mortgage with another loan of equal size. However, due to the higher amount you borrow, you may pay a slightly higher interest rate on the new financing.
Compared to home equity loans and home equity lines of credit, cash-out mortgage refinance gives you a better rate of interest. You also get to improve your credit score by using the additional cash flow to repay your credit card debts thus reducing your credit utilisation ratio.
Refinancing your rental property is one of the best strategies of lowering your loan instalments and interest rates. If you get the timing right and get the best lender, you could even end up having some extra money that you could use to consolidate your debt, pay off other debt,s or use to improve your existing rentals.