Today I am writing about a key element to wealth creation in real estate; Refinancing.
Refinancing a mortgage means paying off an existing loan and replacing it with a new one. This can be done at the bank that currently hold’s your mortgage or you can shop around for the best terms from other lenders.
There are many reasons why homeowners refinance: to obtain a lower interest rate; to shorten the term of their mortgage; to convert from an variable-rate mortgage to a fixed-rate mortgage, or vice versa; or to tap into home equity to finance a large purchase, or to consolidate debt.
With Real Estate investing we are often using the latter. We tap into home equity in a current property to fund the downpayment and/or renovations of a new rental property investment.
So I’ll dig into each reason a little more below. (As always though, these are only musings based on my experience and are not financial advice. Please seek a mortgage, financial and tax expert.)
As part of a larger strategy
Refinancing is a critical element of the BRRRR strategy. This is our main strategy at Ontario Assets. In fact, you can read all about this strategy in previous posts.
Once you have renovated and tenanted your investment property, you can now refinance with a lender at the new after-repair value (ARV). This allows you to extend a home equity line of credit (HELOC) against the property or simply take a chunk of cash out for your next project.
Refinancing may also be a component of a different strategy, as well. Perhaps it is an item in a joint venture (or co-venture) agreement; the co-venture may have outlined a 5 year term at which point each partner shall receive a capital distribution. In these instances, unless you intend to sell, you would need to refinance.
To improve your rates and/or terms
This is very often the case if a property was initially financed using B-lenders, private funds, hard money or your own HELOC. However, even when using traditional bank lending it can make sense to refinance if there are favorable options at given time as the rates and terms banks offer change over time.
For example, we recently refinanced an investment property, with our co-venture client, that had a 4.99 percent loan on it and replaced it with one that was 3.50 percent.
It’s also important to remember that interest rates aren’t the only thing to look at. There are many other terms to think about with a loan, including:
- Associated fees and monetary penalties that may be triggered by breaking your existing mortgage.
- Fixed rate or adjustable (it may be better to refinance an adjustable loan into a fixed one to reduce risk)
- Amortization (even at the same interest rate, a 20-year amortization will require substantially higher payments than a 30-year amortization)
- Loan fees or “points” charged by your new lender or broker (high fees could make even an attractive interest rate unaffordable.)
To allow you to pull out equity
You can’t buy much with equity; To spend it, you’ll need to “unlock” it.
Unlocking the equity in your properties is a powerful key to growing wealth quickly. If you have held an investment for some years, you have not only benefited from some appreciation but lots of mortgage pay-down (ideally paid by your tenants!). A great growth strategy is then to refinance properties you own and use the unlocked capital to purchase new assets.
The main consideration here is whether your property’s income will be able to cover the increased mortgage amount.
You may also consider a refinance for debt consolidation. Mortgages are much cheaper than credit cards and other lines of credit (LOC). If you have high-interest debt, it makes a lot more sense to pay them off with a lower interest HELOC.
Since we are investors here at Ontario Assets, we don’t recommend using our capital to run up these types of consumer debt, but shit happens and if it does we would rather you use smart debt service.
Real estate investors need refinancing to contain or lower costs, to continue growth in our portfolios or as part of a strategic contingency plan.
Reach out to discuss your thoughts or needs in a FREE strategy session.