What to Consider Before Refinancing Your Property

As a real estate investor, you should stay up to date with how you can get the most out of your property while cutting costs as much as possible. Reports show that in the US, up to 63% of property owners have a mortgage on their property. In Canada, 40% of all real estate owners took out a mortgage for their property.

Mortgages and loans when investing in real estate are pretty common, and often become a chronic cause of stress for investors. If you happened to purchase your property on a mortgage, you might have considered refinancing it at some point and wondered about the pros and cons that come with it.

There are many things to consider before refinancing your real estate property, let’s talk about them.

Things to consider before refinancing your property

1.   Interest rate

The primary reason real estate owners consider refinancing their property is to get a lower interest rate on their existing property loan. Even a minor reduction in interest rate can lead to thousands of dollars in overall savings for the property owner. The first step to refinancing your property is comparing interest rates and projecting what kind of reduction you can get on yours.

Interest rates on real estate are susceptible to many changes and are in a constant state of flux. The most common influencing factor of changing interest rates is the cash rate in your country. When the national cash rate spikes, lenders tend to hike up the interest rates on loans and mortgages.

On the flip side, a lower cash rate environment makes it an ideal time for you to refinance your property since you’re likely to get a lower interest rate. However, it’s always essential to keep in mind that a lower interest rate can always end up increasing down the line. You can avoid any surprises by conducting thorough research on interest rate projections for the future, so you can negotiate the most favourable loan conditions possible.

2.   Property value and equity

Equity is essentially the difference between how much you owe to your loan and the overall value of your property. If your real estate’s value goes up after you’ve taken out the mortgage, your equity also goes up, giving you more leverage as a borrower. Your property’s equity is like a deposit, so it’s really important to build it up as much as you can for refinancing it later on.

Before you consider refinancing, take some time out to calculate the current equity on your property. You can use a calculation tool or consult a professional to do this.

3.   Refinancing cost

Unfortunately, refinancing is a costly endeavor in itself. There are numerous fees involved from discharge fees, application fees, and valuation fees, among others. If you have a fixed loan on your property, you will most likely have to pay a hefty break fee.

Before you begin refinancing your property, take a moment to calculate and consider the cost of refinancing. Compare these costs with how much you’re likely to save on a new mortgage deal and make an informed judgment. If the cost of refinancing is higher than your overall savings, later on, it’s probably not worth the hassle.

4.   Why are you refinancing?

To acquire the best deal on your property’s mortgage, you need to figure out why you’re refinancing in the first place. Not every real estate investor refinances their property for a lower interest rate, there are often a myriad of other reasons. You need to be clear on your reasons so you can refinance your property as well as you possibly can.

Here are some common reasons property owners consider refinancing;

• More loan flexibility
• Different payment schedule
• More loan features
• Debt consolidation
• Accessing equity
• Changing loan terms (going from short term to long term or vice versa)

5.   Your credit

Refinancing falls under the umbrella of credit applications. This means that it is susceptible to everything that comes with having a low or high credit score. Check your credit score before you refinance to make sure you have a higher chance of qualifying.

You mustn’t roll the dice with a low credit score and a refinancing application; a rejected application can put an even bigger dent in your credit. There are many websites that can help you calculate if you are likely to qualify for refinancing, and you can always consult a financial advisor for expert advice.

Now that we’ve covered the basics of what you need to consider before refinancing, let’s talk about the pros and cons of refinancing.

Pros of refinancing

1.    Lower interest rate

We’ve already talked about this, refinancing is a good opportunity to get a lower interest rate on your mortgage. This depends on market conditions and the interest rate environment of course. To take advantage of lower interest rates, you’ll need to wait for the right time to refinance.

2.    Move long term to short term

You can look at refinancing as an opportunity to move to a shorter-term loan. Long-term loans typically tend to have a higher interest rate. Switching to a short-term loan plan means you’ll be debt-free sooner and who doesn’t like the idea of that?

3.    Cash out your equity

If you’ve made improvements on your property and paid off the loans in a timely manner over a longer period, you’ve probably racked up high equity. Refinancing grants you access to your equity, which means you can cash it out if you have a big expense coming up.

Cons of refinancing

1.    Minimal savings

Your savings can be minimal or significant depending on how low or high the interest rate is at the time of your refinancing. Unfortunately, there’s no guarantee that you’ll absolutely save money if you refinance your property.

2.    Time-consuming

Refinancing is incredibly time-consuming and exhaustive. To secure a lower interest rate and better loan conditions, you’ll need to invest not just money but considerable time and energy into the task. If you’re not likely to see a big change in your mortgage conditions and interest rate, it might be worth reconsidering the whole thing.

3.    Refinancing fees

We’ve already mentioned this but it’s worth mentioning again. Refinancing fees are no joke, they often amount to tens of thousands of dollars. Take good time considering how much you’re likely to save and how much you’re spending on refinancing.

Refinancing your property is not a decision to take lightly; there are many factors, pros and cons to consider before doing it. It’s important to do your thorough research and become as informed as possible before going forward with filing for refinancing.