Should I Just Try to Refinance My Property?

As a property owner, it is common to want to explore options for lowering your costs, increasing your cash flow, or leveraging your investment for growth. Refinancing sounds quite attractive, especially when interest rates are low. However, it's not always the right choice in every instance. Before making a decision, let's first consider a few critical factors that might help answer the question: Should I just try to refinance my property?

1.     What Exactly Refinancing Means

In simple terms, refinancing means replacing your existing loan with a new one, hopefully with better terms. The new loan will pay off your current mortgage, leaving you with just one loan to repay. Benefits often range from lower monthly payments to shorter loan terms, or even access to home equity. Nevertheless, this process typically involves fees, paperwork, and some degree of risk; hence, weighing pros and cons is important.

2.     Refinancing Benefits: When It’s Worth Considering

Lower Interest Rates: If the interest rates have fallen considerably since you borrowed your mortgage, refinancing can lower your monthly installments. Even a small decrease in rates can make a large difference when it comes to the life of your loan.

Access to Equity: Refinancing lets you take a portion of equity out from the property that can be reinvested into property upgrades, consolidate debt, or be put to other uses. Shortening Loan Term: Switching from a 30-year mortgage to a 15-year loan can save you some overalls on interest payments and enable you to pay off the property even sooner.

Changing Loan Type: Refinancing into a fixed-rate loan from an ARM can provide more stability, particularly if rates are expected to rise.

3.     Possible Downsides: Where Refinancing Might Not Be the Best Option

Closing Costs: Refinancing also means a reprising of appraisal, origination, and closing over again, sometimes substantially. You'll want to make sure the long-term savings outweigh these upfront costs.

Longer Loan Terms: If you have already paid many years into one, refinancing to a different 30-year loan may continue to push you back because, instead of the principal amount, more of your money will be tied up in paying interest.

Prepayment Penalties: Some mortgages charge penalties if you pay off the loan early. If that's the case, then you should check the terms of your existing mortgage to avoid an unpleasant surprise.

4.     Questions to Ask before You Decide to Refinance

Are the Savings Better than the Costs? Calculate a total of refinancing costs and weigh these against your savings over time to determine whether refinancing meets your financial objectives.

What Are My Long-Term Plans? The thing is, if you are going to sell the property in the near future, then refinancing won't give you enough time to break even on the costs. On the other hand, if this is a long-term investment, then refinancing can be a very useful approach.

Am I Seeking to Tap Into Any Equity? Refinancing with cash out gives the property owner immediate access to cash, which is good for capital improvements or other investments.

5.     Contemplate Alternatives to Refinancing

If refinancing does not appear to provide enough benefits, consider the following alternative approaches:

Loan Modification: Some lenders offer loan modification programs that will decrease monthly payments without the cost associated with refinancing.

Home Equity Loan or Line of Credit (HELOC): If access to equity is what you want, these will provide funds without technically touching your first mortgage and are therefore pretty flexible, with possibly lower costs.

Restructuring Budget and Payments: The alternative to refinancing may simply be budgeting changes or focus on additional principal payments to reduce your loan faster.

The Takeaway:  Is Refinancing Right for You?

Refinancing is one of the most excellent tools an owner can have in real estate investments, though it is not a one-size-fits-all solution. Above all, define your financial goals, then weigh the costs versus benefits of refinancing. Think about your current loan terms, interest rates, and long-term property plans to decide whether refinancing will be a good choice for you.

Otherwise, for those who are still unsure of options, The AREM Group LLC is here to help. Our expert team can discuss the potential of your property and offer solutions. Give us a call today to discuss the best way forward.