If you’re a real estate investor, you know that refinancing can be a great way to access capital or get a better interest rate. But did you know different refinancing strategies can work best for different situations? This blog post will outline smart refinancing strategies that real estate investors can use to achieve their goals.
First, What Is Refinancing?
Refinancing is when you take out a second mortgage using your current home equity to obtain cash. In the process, it offers the following benefits:
For this reason, many homeowners who want to invest and make money on real estate use this strategy for funding. However, since the 2008 financial crisis, refinancing has become more complicated. As banks tightened lending standards, fewer people could get mortgages.
Before you apply for refinancing, consider these strategies to ensure you make the right decision:
Table of Contents
1. Evaluate Your Current Situation
What is the reason you want or need to refinance? How much cash would you like to free up, and what do you plan on using it for? Is this a permanent solution, or can you quickly pay off the new loan? Make a list of all the items you need to accomplish with your refinancing.
Know how much you can afford. When refinancing, you may have to pay closing costs. These fees are generally 1 to 3 percent of the loan amount. If you don’t have enough cash saved up for this expense, it might not be wise to refinance right now.
Check your credit score. It is just as important when refinancing as applying for your initial mortgage. Bad credit means you could end up paying higher interest rates, which will cost you even more in the long run.
If you’re considering refinancing, consulting legal counsel is always advised, especially if your home equity has dropped significantly since your initial purchase of the house. Legal counsel can guide you through this process and help you get the best possible deal.
2. Know Your Options
You can refinance in different ways. The traditional option is to apply for a new loan to pay off the balance and hopefully take advantage of a lower interest rate.
Then you have cash-out refinancing. You take out more money than your current home is worth to pay off your first mortgage and pocket the difference.
It has a higher interest rate and can be risky if the property value has dropped. You may not have enough equity to cover the second loan amount. However, you can use the cash for other things, like paying a down payment for a second house.
You can also explore the BRRR method. BRRR stands for buy, rehab, rent, and refinance. You can use it to buy a rental property that needs work. Once it’s fixed up, you rent out the home and refinance to unlock equity.
Each has its pros and cons, so choose wisely based on your need and capacity.
3. Shop for Lenders
You can get a mortgage from your bank, credit union, or online lenders. Shop around and compare different rates and terms to find the best deal in the market. You may also want to do some background research on reputable companies and see what their clients say about them.
Avoid high-cost lenders. Many “lender scams” target homeowners looking to refinance and can cost you a lot of money. Avoid companies that demand cash upfront or those that promise you lower interest rates if you use their refinancing services.
An excellent way to avoid refinancing scams is to work with an actual company – not a one-person show. A real estate investment firm offers guidance, resources, and protection that you won’t find elsewhere.
4. Time Your Refinancing
If you’re considering refinancing, timing can be essential. Interest rates are constantly changing, so act quickly if you want to take advantage of lower rates.
The last thing you want is for home prices to rebound and make your property worth more than the new loan amount. This makes it harder to refinance. You can save money on interest over time by timing your refinancing correctly.
Refinancing is a powerful tool that can help you accomplish your goals as an investor. Still, it’s essential to approach the process strategically to make sure you’re achieving all of your primary objectives. Whether you’re looking for extra cash or a better interest rate, many effective refinancing strategies can work for your needs.