It is a dream of many people to own rental properties to keep earning them passive income. However, while it is a good idea to acquire a lasting passive income through rentals, you have to consider things such as insurances, property tax, property management, repairs, and other expenses that may arise.
The only way to enjoy your passive income from rentals is by reducing costs as possible. Some rental owners refinance their rental properties to minimize expenses. Refinancing can help you easily access extra funds. If you are still unsure about the refinancing idea, here are the reasons you should consider it.
Reasons You May Want to Refinance
There are several reasons why property owners may want to refinance their rental property mortgage. And here are some of the reasons that may compel a rental property owner to refinance:
Change Term Length – The majority of rental property owners prefer to refinance to alter their term’s length, including the rates.
You can decide to shorten the paying duration to clear the mortgage as early as possible. Alternatively, is to lengthen the paying duration for low monthly repayments.
Lower Rate: Rental property owners opt to refinance to get lower rates. When you secure lower rates, you can save lots of money on interests and possibly speed up your mortgage repayment. Before you consider refinancing, be aware the rates are .5% to .75% higher than the normal mortgage rates.
Cashing out – When your rental helps to clear your mortgage, that is creating enough equity to your property and which may qualify you to access more funds. It involves substituting your current mortgage with a bigger one. What differentiates the two mortgages is the amount of money that you cash out as you wish. Nevertheless, this type of refinancing is not encouraged as it may risk your property. It is advisable to cash out when purchasing a new property or when making improvements to your property.
How to Qualify For a Refinancing?
It’s not easy to refinance a rental property mortgage as it would a normal mortgage. But it is a doable process, and here are the requirements that may prompt lenders to approve your request.
Credit Score: If you make an application using a B-lender, you may be eligible for refinancing with a low credit score. For A-lender, applicants are required to at least have a credit score of 660 to be considered. However, it also depends on the number of house units you have, and that need a credit score of 680 to 720.
LTV Ratio: Lenders require you to have a standard ratio of 75 percent or below. That means you are required to have 25 percent or more equity built in your property. In case you opt to refinance cash-out, you are required to have an LTV ratio of 70 percent, translating to no less than 30 percent equity in your home.
Debt-to-Income-Ratio (DTI) – The DTI ratio considers both debt and income. It helps to measure the extra amount of debt you can manage depending on your current debt plus income responsibilities. In simple words, lending companies prefer a DTI ratio of 40 percent or below. If 40 percent of your income is servicing debt, you are considered high risk. Depending on lending company policies, some may decline your request, and others decide to approve, but at a higher interest rate plus fees.
The Required Documents
Personal Identification: To prove that you are the rightful owner of the property, you are required to provide a copy of title insurance and a government-issued photo ID.
Employment Verification: Lending companies may require you to provide a T4 slip to verify your employment claim. T4 slip shows a summary of your income and deductions for the year.
Insurance Proof: Lenders may ask you to provide home insurance proof to certify whether your property is covered or not.
Income proof – Sometimes, lenders may require you to present bank statements or pay stubs for monthly income verification
Additional Financial Documents: To show your net worth to the lenders, they require you to provide documents of investments, savings and assets. Your documents allow the lenders to judge your capability better to repay the amount given.
Steps on Refinancing Your Rental Property Mortgage
These are processes that you should follow if you plan to refinance your rental property mortgage.
Calculate all the Costs
Consider the costs involved before asking lenders to refinance you. Some of these costs include legal fees, closing costs, prepayment penalties, registration fees and home appraisal charges. Planning before may help you save lots of money in the process.
Identify the Purpose
You need to identify how you plan to refinance the mortgage and why before going for it. For instance, you can decide to take advantage of your property equity by opting for cash-out refinance through a large amount of loan. You can utilize the excess amount to renovate your property, purchase a new property, clear property tax and more. Alternatively, if your focus is to repay the mortgage fast, choose short payment duration to secure lower rates.
Evaluate Your Finances
Examine your finances and credit before applying for refinance to see whether you qualify. Refinance requires you to meet some demands before you are approved. The more your credit score is in good standing, the more it is easy to acquire low-interest rates. In case you have a poor credit score, make sure you work on it first before reapplying. You build a positive credit score by paying your debt and repaying on time.
Refinance your Property
When you settle for the lender of your choice, fill in all the necessary details and submit the needed documents to assist with the refinance process. Lenders like Lendforall may ask for a property appraisal to identify your property value. The procedure normally takes approximately one week, and after your approval, the next step is to sign a contract to finalize the process. Countercheck every detail to make sure you agree.
Compare Lender & Rates
Research around by comparing all lenders and learn more about their costs plus rates. You can easily do so online with comparison platforms to help you get the best quotes that suit you. The focus should not be based on cost alone but on the lending company itself. It is fulfilling to get reputable lenders to work with and for a long time.