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Here’s what you need to know.
How Much Would a Refinance Affect Your Payment?
“How much will my payment go down if I refinance now?” That is usually the most pressing concern from property owners. There are other factors to consider, too, such as how long you plan to own the home and the cost of obtaining a new mortgage.
However, you can get refinancing costs added to the loan, and your payment drops substantially; that is usually enough for beleaguered owners to apply for a refinance—irrespective of how much interest rates will go down in the future. Stopping the bleeding is usually the most important thing on distressed property owners’ minds.
The 2% Rule
The 2% rule says that you should only refinance when you can drop your interest rate by 2%. That’s because savings generated by your new loan will offset the cost of refinancing, provided you’ve lived in your home for two years and plan to stay for at least two more.
Lenders often advertise that they offer no-cost refi, or refis for $500, which is an out-of-pocket expense. They will add the cost of the refinance—usually 2% to 5% of the new loan balance—to the loan amount. Average closing costs are around $5,000, not considering the loan on the property and the state it is located in. The fewer refinances you do, the less money you will add to your loan.
Factors to Consider When Refinancing
Can I eliminate PMI?
If you put down less than 20% when purchasing your home, you will be paying PMI (private mortgage insurance), typically between $30 and $70 per month for every $100,000 borrowed. Once you have over 20% equity in your home, you can refinance and eliminate PMI. However, if you plan to keep your house for a short time, refinancing purely for PMI savings is not worth it.
Refinance an adjusted loan
Many commercial borrowers have gotten into deep water as the Fed hiked up rates because they had floating three-year mortgages with balloon payments that adjusted upward. Going from a 2% mortgage to an 8% mortgage with increasing vacancies has been a perfect storm of disaster.
For many borrowers, a refinance to a lower current rate might not be enough to save the day. Still, depending on the loan and vacancy amount and flexibility of their lender, it might buy them some breathing room before a more substantial refinance further down the road.
Can I pull cash out?
Real estate investors always need cash, whether to perform essential repairs on a rental or to buy more property before rates drop further and prices increase. In this instance, refinancing to pull out cash makes sense, provided the money released from the refinance not only covers the cost of refinancing but can also make money in the future.
For example, if your refinance costs $5,000 and an additional $200 in your monthly mortgage payment but will make you $1,200/month in cash flow on a new property, it will take you five months to recoup the expense of your refinance. In addition, you will have another property gaining equity and offering depreciation and ongoing profit once the refinance costs have been paid.
Refinancing break-even calculator
If you’re curious about the cost of refinancing now, this refinancing break-even calculator is a handy tool to know exactly how long it will take you to break even on your refinance.
When Should Investors Refinance?
Connect with a lender to explore refinance options today.
FAQS About Lenders
What are good questions to ask your lender?
- Are you a direct lender or broker?
- What types of fix and flip loans do you offer?
- Will you communicate directly with the listing agent on the properties I make offers on?
- Where is the source of the money that you lend?
- Do you have access to down payment assistance programs that I can apply for?
- What information do you need from me in order to determine the best long-term rental loan for my situation?
- How long does it take you to provide a pre-approval letter?
- Do you offer any rate lock programs?
- Can you provide references from within the BiggerPockets community?
- Can you help me find other real estate professionals?
What are some best practices when choosing a lender?
- Compare rates and terms from multiple fix and flip loan lenders on the same day.
- Ensure that you ask your lender about what may change between your initial loan estimate and the final rate and terms.
- If your fix and flip loan is a private money loan, be very careful to understand exactly what may change while you are under contract on your property and what could cause your financing to fall through. The fewer surprises the better.
- Consider the reliability of your lender in addition to comparing rates. The lender with the lower interest rate may not always be the best lender for you.
- Carefully consider the pros and cons of fixed rate vs adjustable rate mortgages. Do not assume historical interest rates can be used to predict future interest rates.
How do lender fees work?
- APR
- APR stands for annual percentage rate. It represents the total yearly cost of borrowing money expressed as a percentage of the principal loan amount.
- Interest Rate
- This is considered the rate of interest on your mortgage note. It is less useful for comparing between lenders because the interest rate does not include fees that are a direct cost of borrowing money.
- Points
- Points are a one time fee charged by a lender expressed as a percentage of the loan amount. 1 point is 1% of the loan amount. Oftentimes, lenders will offer the opportunity to pay more upfront in the form of mortgage points in exchange for a lower interest rate over the life of your loan. Work with your licensed mortgage originator to carefully examine if this is worth doing based on your unique situation.
- Fees
- There may be other fees associated with underwriting a loan. It is important to ask your lender to disclose these fees up front.
Note: conventional lenders are required to provide a loan estimate, which discloses their fees. Private money lenders are not held to this standard and receive very little regulatory oversight. As such private money lenders are not recommended for inexperienced investors.
- A direct lender lends their own money. They have more influence over the underwriting process than a broker because they are lending their own money but they are not able to offer as many loan types or shop for the best rate.
- A broker does not lend their own money but instead they connect a borrower with a lender that offers the loan product that they are looking for. They can compare lenders to ensure they are providing the lowest rate and best terms. In exchange they charge a fee for their services.
Note: Some lenders are both direct lenders and brokers. They may lend their own funds for some loans and broker out loans that they cannot fund themselves.
- A direct lender lends their own money. They have more influence over the underwriting process than a broker because they are lending their own money but they are not able to offer as many loan types or shop for the best rate.
What is the difference between a direct lender and a broker?
How much do I need for down payment?
- Conventional loan Downpayment: 3%
Conventional loan (no PMI) Downpayment: 20%
FHA loan Downpayment: 3.5%
VA loan Downpayment: 0%
Private money rehab loan Downpayment: Varies
Private money rental loan Downpayment: Varies, but typically 25% or more
Note: Actual down payment requirements may vary depending on factors such as income and credit score.
What is the difference between a conventional lender, private money, hard money, and commercial lender?
- A private money lender is considered any lender that provides loans from a private individual or company that comes from a private source for investment property loans. Their loans are strictly for non-owner occupied investment properties and they are not limited by the underwriting requirements for conventional loans.
- Hard money lenders are a type of private money lender that underwrites their loans based on the hard asset itself rather than the borrower's qualifications like credit score or income.
- Conventional lenders are the most common type of lender. They offer conventional financing or government agency loans like FHA, and VA.
- All conventional lenders must have a national NMLS number and a state license in the states that they serve. You can search the NMLS license states on the NMLS consumer access website.
- A commercial lender specializes in lending on large commercial income producing properties like retail, office, storage and residential multi-family complexes.
- A private money lender is considered any lender that provides loans from a private individual or company that comes from a private source for investment property loans. Their loans are strictly for non-owner occupied investment properties and they are not limited by the underwriting requirements for conventional loans.
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