“Refinancing” is, without a doubt, one of the most popular words among property owners right now. Since the onset of the novel coronavirus pandemic, mortgage rates have plummeted significantly. The current mortgage rates in 2020 are near historic lows and probably lower than those you are paying now. But does that mean you should replace your existing mortgage loan with a new one?
Well, not so fast. There are a few things you need to take into consideration. While you may save by refinancing, it might not be the right move for you. Whether you refinance rental property or not will depend on your personal situation and what you hope to achieve.
So, when does it make sense to refinance a mortgage? Here are 4 instances where it may make sense for you:
1. To Secure a Lower Interest Rate and Improve Cash Flow
If you’re a real estate investor looking for ways to improve cash flow, refinancing your rental property would be a great strategy. This is actually one of the main reasons real estate investors choose to refinance investment property. Refinancing can lower the interest rate on your current mortgage loan and, consequently, lower monthly payments. This will improve your cash flow. As you know, cash flow is a very important factor in real estate investing.
If investment property mortgage rates have gone down by about 1% or 2%, refinancing could result in significant savings. Moreover, if your credit score has improved (above 750), you may be able to qualify for lower refinance rates. People with the best credit scores usually qualify for the best interest rates.
With that said, real estate investors looking to save money by refinancing should factor in the cost of refinancing. While a mortgage refinance may lower your interest rate, sometimes you might end up paying more over the life of the loan. Consider associated fees and closing costs to know whether it makes financial sense.
2. To Convert to a Fixed Rate Mortgage or Adjustable Rate
Converting an adjustable-rate to a fixed-rate mortgage could also be a viable answer to “When does it make sense to finance a mortgage?” If you have an adjustable-rate mortgage and you are looking for stability in your budget or interest rates are expected to rise in the future, you may want to lock in a fixed rate.
An adjustable-rate mortgage will typically have a lower rate than a fixed-rate mortgage. However, there may be periodic increases in the rates depending on real estate market conditions, sometimes surpassing that of a fixed-rate mortgage. Therefore, converting to a fixed-rate mortgage will eradicate your concern over possible interest hikes in the future.
On the other hand, if you have a fixed-rate mortgage and interest rates are falling, you could consider switching to an adjustable-rate mortgage. This would make more financial sense if you are planning to own the rental property for only a few years.
3. To Shorten Your Loan’s Term
If you are a real estate investor in 2020 and the question “When is it worth it to refinance?” is lingering in your mind, one reason could be to shorten the term of your loan. For instance, you may want to switch from a 30-year mortgage to a 15-year mortgage.
When rental property mortgage rates go down, it is usually a good opportunity to refinance your existing loan for one with a shorter term. While there may be no significant change in the monthly payment, refinancing for a shorter period would enable you to pay off your mortgage sooner. Consequently, you will build equity on your rental property quicker.
Related: Paying Off Investment Property Mortgage Early: Pros, Cons, Tips
4. To Tap into the Equity in Your Investment Property
If your current mortgage balance is lower than the value of your investment property, a cash out refinance may make sound financial sense. You can refinance rental property and use the cash you take out to do property updates, make emergency repairs, finance the purchase of a new investment property, or consolidate debt.
If you have built up a considerable amount of equity, buying a second investment property would be a wise move. In that case, you want to make sure you are buying a profitable one. Be sure to use Mashvisor’s real estate investment tools to find and analyze investment properties in the US housing market 2020.
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Related: What You Need to Know About Real Estate Equity
Should You Refinance Your Mortgage in 2020?
As mentioned, in response to the coronavirus pandemic, rental property mortgage rates have plummeted significantly. Stocks have been crashing and people are now going for safer investments like Treasury bonds. Moreover, the Federal funds rate has been dropping. In March, the Federal Reserve announced that it would be cutting its interest rate to essentially zero and buying mortgage-backed securities. This, together with the $2 trillion economic stimulus package, has further been pushing mortgage rates down to record lows.
Related: What the 0% Interest Rate Means for Mortgage Rates
While it’s hard to predict whether mortgage rates will stay low, it’s certainly likely they will for a while. In light of the current state of mortgage rates due to the coronavirus, refinancing a mortgage in 2020 may be a good move. If after looking at the above-mentioned situations you can conclude that it makes sense for you to refinance a mortgage, you can jump at the chance to save a significant amount of money.
This could be a great time for a real estate investor to lock in a rate that ensures better cash flow. We may actually never see such rates again any time soon or probably even in our lifetime. With the coronavirus pandemic adversely affecting the economy, this may be one of the silver linings.
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The Bottom Line
Refinancing a mortgage in 2020 can be a great financial move for investors. When used appropriately, it can bring you closer to your real estate investment goals. However, without proper research, the strategy could easily backfire and put you in a worse situation. Therefore, before you make this move, make sure you have a good answer to the question, “When does it make sense to refinance a mortgage?”
Before you decide to refinance a house, be sure to evaluate the cost of refinancing and your financial situation. Even if you will be able to save by refinancing, it shouldn’t cause you new problems. Be sure to also shop around to find lenders with the best rates and refinancing fees.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.