In the past 20 years, mortgage refinancing has grown to be an investor’s resource for raising capital. Not that big of a surprise, considering we’ve seen mortgage rates dip during the past few years. At the height of the foreclosure housing crisis, rates averaged about 5%-6% for a 30-year fixed-rate investment property mortgage.
Today, the average rate for a 30-year fixed mortgage is about 5.26%. This rate point allows investors a chance to save by lowering their payments.
Borrower: John Smith
Property: Single Family Home
Type: Fix & Hold/Rental
Term: 12 Month Short Term loan with a higher interest rate
Finances: the situation has improved, property cash flowing, and credit score has increased.
Determination: refinancing is worth the effort.
In this case, it makes sense to refinance. Amid a looming recession brought on by the pandemic and rates are fixing to rise in the months to follow, refinancing is plausible. While refinancing may not be right for every investor it’s wise to make sure this strategy works for you. Get familiar with your options as you build your portfolio. The better your experience and credit history the better opportunities come your way. Here’s everything you need to know about refinancing your investment property. From how to start the process, to figuring out if it’s the right thing to do.
☛Estimating Refinancing Costs
In every aspect related to investing it is best to step in with your eyes wide open. As a rule of thumb, refinancing will generally cost from 3% to 6% of your loan’s principal value. As a savvy investor, you should be sure to shop around to make sure you’re getting the best deal for your situation.
Since you’re essentially applying for a new loan, there will most likely be fees if you choose to refinance. Because of this, it’s important to consider those costs compared to the potential savings. A good rule of thumb is to make sure you can recover the cost of the refinance in 2-3 years
Today, the internet is filled to the brim with a variety of online calculators. These lender-sponsored tools help to determine your refinance costs. Unfortunately, this information is not always accurate because all lenders are different. Especially, if you are using private funding or investment capital. The lender will provide you with a rate quote that includes origination fees for your new loan. These fees include points and closing costs. At times, lenders may not charge origination fees. In that case, they may instead, charge the borrower a higher interest rate. So, look for the best-case scenario for your investment strategy.
Investors with credit scores above 760+ are considered top-tier borrowers. According to FICO.com, 59.25% of the American population has a credit score of 700 or above. Additionally, only 1.6% of the population has a perfect score of 850. So, if you fall within the parameters of 700-850 lenders will give you the keys to the kingdom. A combination of good credit history, coupled with a strong investment track record can open doors for you. Lenders like ROGP Capital will reward you with capital that can help grow your portfolio. Rewards may include offering competitive rates, fast funding, and no hidden fees. Additionally, developing a solid partnership with your lender and including them as part of your team is a smart move when developing your portfolio.
Determine your plan for the refinance option. Anytime you pool your cash for investment, make sure you develop a good plan of action. There are several mortgage loan types, but “rate and term” and “cash-out” are the two most common. Bridge loan programs and rental loan programs for multi-family and commercial properties are also very popular with investors that have portfolios. We will discuss these programs later in an upcoming article.
☛Rate and Term- when you refinance a loan for “rate and term” you are revising your loan’s interest for a better one. The term (or length) of the loan can also be a concern. So, refinancing a mortgage can be attributed to either rate, term, or both. You can also switch from an adjustable-rate to a fixed rate and vice versa.
Keep in mind, that once you determine your goal, your primary focus will be determining whether the fees are worth what you’ll gain as an investor.
☛Cash-Out- With a “cash-out” refinance, you withdraw all or a part of your increased equity. This is usually done to fund common repairs or invest in more property. This is an excellent tool if you use it wisely. it’s rarely advisable to take out more than you absolutely need.
Fix & flip investors, usually get short term loans (6-36 Months). The property gets rehabbed and completed. A new appraisal is requested with the current After Repair Value (ARV). If done correctly, the property appraises for more after repairs. This allows an investor to cash out some of the equity and opt for a long-term loan with optimal rates. Keep in mind, that not every refinance processed will save you money on interest. It all depends on the current rates at the time of the loan submission.
☛Steps to take before and during your refi
STEP 1. Check your credit score and credit history for any anomalies. Your credit score determines your rate. It’s that simple. Taking a proactive approach to your credit history is the best tactic. Track and manage errors and focus on taking steps to boost your credit.
STEP 2. As an investor, it’s important to know the value of your investment. Stay tuned to comparable sales prices in your market so you know their value. Keep up with your investment market trends and dips. If the value of your investment property has gone up significantly and improves your loan-to-value ratio (LTV), this will be ideal. It will also help you secure the best refinancing rate and cash-out amount.
STEP 3. Rate shop online. Compare traditional and private funding options. Both capital opportunities are worthy, but they are very different. Traditional banks are not keen on funding investors but their rates are better. They also tend to take longer (60-90 days). Private funding options however may be a bit higher, but they fund faster (5-30 days), are investor-friendly and are more flexible. Also, don’t forget to ask about all costs and fees involved. Most lenders should be able to give you an estimate, but the accuracy can depend on many factors. Understanding your credit score and LTV ratio is paramount when shopping around for funding.
STEP 4. Organize your paperwork. The lending process is all about momentum. The process will move faster if you have your documents available. As an investor, you should have your property rent rolls, profit and loss, proof of funds, 3 months mortgage statements, and other pertinent financial information ready to go. If you completed a rehab, make sure you have the previous appraisal, copies of repair receipts, a scope of the work report, with a list of what was rehabbed. These items will work in your favor and helps the lender understand that you are a serious investor and deserve consideration.
STEP 5. Have cash on hand. So many times, I come across so many unrealistic investors that are looking for 100% financing. They read a book or a blog about some guru that provides some technique to get 100% funding. The reality is that all lenders want you to have a little skin in the game. Having funds to operate, ensures lenders that you have a stake in your success. Besides, you may have to pay some up-front costs, like appraisals, property taxes and insurance.
Look out for an article we are working on about creative ways to finance deals and build your net worth one deal at a time.
STEP 6. The lender will forward a rate quote that you will need to sign to start the process. The rate quote should itemize all origination fees and closing costs required. In some cases, you will be able to lock the rate in so you don’t lose it during the origination process. Then you will need to submit a list of documents requested by the lender. If you planned ahead, you will have them ready. The lender will initiate an appraiser to evaluate the property and determine the current “As-is -Value.” FYI…most lenders prefer to hire appraisers in their network so let them handle that part of the process. Once the subject property value is verified the lender will reconfirm the loan amount based on LTV. It can be 65%-90% of the LTV depending on the lender. The closing is then scheduled with the refinancing company, mortgage broker, and real estate attorney. Keep in mind that some states require an attorney and others allow a title company to close. So, make sure you understand your state’s preference. Keep in mind, that each lender is different, and their process may vary. Especially traditional lenders compared to private money lenders. Each has underwriting preferences that may be odd, but if you need the loan, follow the lenders’ request.
The process can take anywhere from 20 to 90 days, depending on your diligence. Also, the complexity of the loan and the efficiency of the lender or broker can add or subtract time. If you are looking for speed, look for private lenders like ROGP Capital who are looking to disrupt the traditional lending process. By offering a more streamlined service and a better investor experience.
If you’re like most people, you’ve got a life to live and don’t want your mortgage to refinance to drag on for months. Keep this in mind when looking for funding next time.
Maximilian D. Lucena
DIRECTOR OF ACQUISITIONS & CAPITAL FUNDING
Office: 904-876-3080, Ext 5
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