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Mortgage rates are at record lows right now, and most experts predict they’ll stay that way for some time. In fact, according to Fannie Mae, the rate on 30-year, fixed-rate loans should sit around 2.7 to 2.8% for all of 2021.
As an investor, you might be tempted by those rates -- especially if you took out a mortgage a few years ago, when rates were in the 5 to 6% range.
It raises the question: Should you think about refinancing? If you have mortgaged properties in your portfolio, it’s definitely worth consideration. Before pulling the trigger, though, make sure you ask yourself these five important questions:
1. Will I get the lowest rates?
Not everyone qualifies for the lowest rates, and investors are generally a riskier bet for lenders than traditional homeowners are. For these reasons, it’s important to look long and hard at your financials before moving to refinance.
Pull your credit, and make sure there are no delinquent marks and that you’ve got a solid score (think 740 or higher). You should also consider your debt-to-income ratio, as most lenders like these at 43% or less. Since you’re an investor, the health of your business and property -- how much rent it’s brought in -- will also play a role.
2. How long do I plan to hold the property?
Refinancing is only worth it if you’re able to reach the break-even point, the point at which your savings outweigh the costs to refinance the loan. If you don’t plan to hold the property much longer, then there’s very little chance you’ll hit that break-even point, and you’ll likely pay more to refinance than you’ll save over time.
Keep in mind that housing markets can always turn. If you want the flexibility to sell and cut your losses if needed, make sure your break-even point is two years or less. This will give you enough flexibility to get out should something go awry.
3. Do I need more cash?
One of the biggest benefits of refinancing is that it can free up cash. First, it can lower your interest rate and monthly payment, giving you more cash flow to put into your business.
If you opt for a cash-out refinance. It might also mean a lump-sum chunk of cash. You can use the funds to make repairs on your rental, pay for your next flip’s renovations, or even as the down payment on your next investment purchase. Cash-out refinances typically come with higher interest rates and are harder to qualify for, so talk to a lender or mortgage broker to be sure you’ll qualify.
4. Do I have the up-front money?
Refinancing doesn’t come for free. You can usually expect to pay anywhere from 2% to 5% of the loan balance in closing costs, and while there are options to roll these costs into your loan, they’re rarely worth it -- especially for investors.
Rolling your closing costs into your loan only extends your break-even point, making it harder to recoup your costs on the refinance.
5. What’s my goal?
Understanding your goal is critical in the decision to refinance. If you’re simply looking to save cash, then securing a low interest rate should be your main focus. If you’re hoping to get away from PMI, then lowering your loan-to-value ratio is where you should set your sights.
Always talk to a mortgage broker or loan officer about your refinance goals before moving forward. They can help you gauge expectations and ensure it’s the right move for your finances (both now and in the long term.)
The bottom line
It’s shaping up to be another great year for mortgage rates, and it could be a great time to refinance. Just make sure you understand your goals, know where you stand financially, and that you’ve looked at it from all angles before moving forward. Talking to a mortgage lender or broker can help point you in the right direction as well.
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