Starting the mortgage refinancing process

Buying a house or rental property is one of the best investments you can make. This approach is especially successful if you’re looking at property in thriving communities in Texas, Arizona, or Colorado. Finding the right property is a great start for real estate investors. It’s also important to get the right loan.

Luckily, you don’t have to get the perfect loan right away. Circumstances change over time, and the loan that works for you now might not be the loan that works for you later. It’s also possible that you can get a better loan today than you could when you bought a property. In either case, it might be time to refinance the mortgage.

What Does It Mean To Refinance A House?

What exactly does it mean when people refinance mortgage loans? This is your opportunity to replace your mortgage. It makes sense when your existing mortgage just isn’t fitting your needs anymore or if you have a chance to get yourself into a better loan.

There are some costs associated with refinancing a mortgage, though. In other words, it’s not something you want to do all the time. The decision to refinance a mortgage should be a strategic one, and you can get it right by knowing when it makes sense to refinance your mortgage.

4 Reasons To Refinance Your Mortgage

Refinancing mortgage loans makes sense when you do it for the right reason. Every situation is different, and there’s no one-size-fits-all answer to the question of “when does it make sense to refinance a mortgage?” Still, we find that the most successful real estate investors normally refinance mortgages for one of four main reasons.

1. Change Your Loan Term

Longer loans mean more payments and more interest. Depending on your situation, it might make sense to explore a different loan with a shorter term. People often look into refinancing mortgages to change 30-year terms to 15-year terms. Your monthly payment will get higher because there are fewer payments, but you’ll pay less interest overall.

On the other side, people choose to refinance mortgage loans to go with longer terms. This means more interest over time but lower monthly payments. This kind of move makes sense if you want to reduce your monthly payment and free up money for other projects.

2. Lower Your Interest Rate

If you keep up with financial news, you already know that interest rates are always changing. If you got a loan when interest rates weren’t especially favorable, you might want to refinance when the rates go down. Getting a better home loan interest rate will lower your payments and ensure you spend less on interest throughout the life of your loan.

In some cases, you might be able to get a better interest rate even if national rates haven’t dropped much. For example, you might have improved your credit or made the loan less risky. When there’s less risk to the lender, they can offer you a more favorable loan.

You might also be able to get a lower interest rate if you’ve formed a good relationship with the lender. This is one of the top reasons people choose private money lenders like Capital Fund I. We’re not tied to national interest rates, which gives us more discretion when we provide loans. Investors who work with us enough to form trusting relationships can get loans with great interest rates.

3. Change Your Loan Type

Because markets like Scottsdale, Denver, and Dallas are so competitive, you have to move fast to secure the top properties. Getting a traditional loan can take a long time, and sometimes it’s hard to get this kind of loan for an investment property. That’s where hard money loans can save the day, but it’s important to know how hard money interest rates differ from traditional loan interest rates.

A hard money loan might be your best bet if you want to close on a property quickly and add it to your real estate investment portfolio. When you apply for a hard money loan, though, it’s normally because it’s the best solution for the immediate term. Once you secure your property or complete your project, you can explore other loan types by refinancing the mortgage.

4. Cash Out Your Equity

A cash-out mortgage refinance is a powerful tool for real estate investors. When you refinance mortgage loans in this way, you’re borrowing more money from the lender than you actually owe on the home. The difference between what you borrow and what you owe goes straight into your bank account.

You can do this when the value of your home has increased compared to what you owe on it. It’s a good way to get a quick cash infusion. You can use that as spending money for home improvement at your property to increase the value of your investment even more.

You might also choose to use the money from your cash-out refinance for other projects. In many cases, cash-out mortgage refinancing is used as a way to consolidate debt or improve your loans. It helps to weigh the tax and interest implications against what a cash-out loan will allow you to accomplish.

How to Refinance Your Mortgage

Now that you know some of the benefits of refinancing a mortgage, you might be interested in taking the next steps. You can go into more detail by talking to a mortgage refinancing expert, but here’s what you need to know at a glance:

  1. Set Your Goal – Don’t refinance just to do it. Have a clear image of what you what to accomplish financially, then go find an option that gets you to your goal.
  2. Assess Your Credit – If your credit has only worsened since your last loan, you’re not especially likely to get a better mortgage. There might be exceptions, such as favorable market conditions, but boosting your credit before you refinance can help. The exception is if you work with an asset-based lender that doesn’t check credit (like Capital Fund 1).
  3. Consider Your Home Equity – Your home equity is the difference between the fair market value of your home and what you owe. For example, if the property is worth $500,000 and you owe $300,000, you have $200,000 in equity. The more equity you have, the better loan you will get.
  4. Shop Around – Simply put, start collecting quotes. You might be surprised by what you learn by talking to a few different lenders.
  5. Prepare Your Paperwork – Your refinance mortgage lender will tell you what you need in this department. Common requests include tax returns and pay stubs. As an asset-based lender, Capital Fund 1 doesn’t ask for personal tax returns but is likely to ask for bank statements instead.
  6. Get an Appraisal – You estimated the fair market value of your home a few steps ago. To go through with refinancing your mortgage, you should get an official appraisal. Don’t forget to tell the appraiser about all your work on the property, if relevant.
  7. Prepare for the Immediate Costs – Getting your appraisal shouldn’t cost much more than a few hundred dollars in most cases. The closing costs to finalize the loan will be more substantial, often about 5% of the total value of your loan. In some cases, you’ll be able to finance the closing costs, but this is rarely a favorable move to make.

Once you’ve followed all of these steps, all that’s left is to congratulate yourself on a job well done, then keep up with your new and improved loan.

A Mortgage Refinance Can Make Your Home Work For You – Talk to Capital Fund 1

Capital Fund 1 specializes in mortgage refinancing. We have long-term relationships with many real estate investors. Our borrowers can often refinance for much more favorable terms as trust improves over time. If that sounds like the lending relationship you’ve been looking for, reach out to a member of our team today!

Important Refinancing Mortgage FAQs:

An experienced lending expert at Capital Fund 1 will be able to answer all of your questions in great detail, but here are a few of the most basic questions we receive.

How does refinancing a mortgage work?

The simplest answer to this question is that you’re trading in your old loan for a new one. Your new mortgage will often have a lower interest rate or more appealing monthly payments.

When should I refinance my mortgage?

Every situation is different, but many people refinance their mortgages for one of the following reasons:

  • To reduce monthly payments
  • To reduce exposure to interest
  • To pay the mortgage off more quickly
  • To eliminate mortgage insurance, if relevant
  • To cash out the equity already built in the property
  • To switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan
  • To move from a short term loan, hard money loan, to a longer term rental or DSCR loan

Is a second mortgage the same thing as refinancing?

No, these are not the same. There are some similarities because a second mortgage involves borrowing money against the equity in a property. However, a second mortgage leaves you with two separate mortgage payments. Refinancing leaves you with a single mortgage. If you’re unsure about whether a second mortgage or refinancing your existing mortgage is better for you, weigh your options with a private lender.

How soon after closing can I refinance?

This depends on your situation. You will likely have to wait 180 days after closing to do a cash-out mortgage refinancing. In other cases, you can refinance fairly immediately. If your current lender is telling you you can’t refinance yet, it might be worth talking to another lender for another opinion. Sometimes you can refinance immediately by going with another company.

Will refinancing my home affect my credit?

Refinancing can, and likely will, hurt your credit score in the short term. Over the long run, however, it will actually help your credit. This is especially true if you make a smart refinancing decision to serve the goal of boosting your credit score.

Many lenders check your monthly payments and total debt amounts before giving you a loan. Refinancing your mortgage can help with both of those two things. It all depends on your current situation and how long you will wait to see your score improve after an initial dip.

Featured Image: kenary820 / Shutterstock