Refinancing a loan is when you replace the current financing of a property with a new loan, often with another lender, but not always. There are two main types of refinance loans: a rate and term refinance, and a cash-out refinance.
A rate and term refinance is when you refinance an existing loan in order to change the interest rate and/or terms of the loan. For example, investors often refinance their 12 to 24-month hard money loans into permanent, 30-year financing.
A cash-out refinance can happen in two situations including: (1) replacing an existing loan with a new, larger loan and putting the difference in your pocket, or (2) taking out a new loan on a property that you currently own outright and putting the cash in your pocket. Cash-out refinances are very popular among Visio borrowers as a means to grow their rental portfolios. Often our investors will use cash-out refinances to buy new investment properties, finance a flip, or finance a renovation to raise their rents on the property financed or another rental property they own.
Visio Lending’s laser-like focus and rental loan expertise simply cannot be matched. Would you go to a foot doctor for a headache? Or an employment attorney for a divorce? There is something to be said about going to a specialist for the specialty you need.
Let’s get specific. Here are few ways Visio’s focus helps you:
The process of refinancing a loan is very similar to financing a purchase. See our process for details on Visio refinances.
There are many pros of refinancing a rental property including the ability to get better terms and rates, the ability to lower your monthly payments, and the ability to access equity from your home for other investments.
Some cons to consider are that you will have to pay fees and closing costs on a new loan.
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The documents required to refinance a rental property depend on the lender. Visio Lending does not require tax returns or income verification. See our list of documents needed to close a loan.
There are no hard limits on how often you can refinance your investment properties, but there are some items to consider. First, most loans on investment properties have prepayment penalties. If you’re not sure how prepayment penalties work, read this article. Whether to refinance a loan with a prepayment penalty depends on performing a break-even analysis – in other words, how much will you pay upfront in fees and prepayment penalties and how long will it take you to recoup that amount through savings or returns on reinvestment of proceeds from the new loan?
Second, even if you don’t have a prepayment penalty or it has expired, you likely will have some fees and other costs associated with refinancing. Again, you’ll want to perform a break-even analysis to determine how long you’ll need to hold the property to make the refinance worthwhile.
For example, let’s assume you’re going to pay $5,000 in fees and other expenses (appraisals, title costs, etc.) to get a refinance, and you’ll save $250 each month with the new loan. $250 each month until you get back the $5,000 in expenses means that you will break even after 20 months. If you think you’re going to hold the property for at least 20 months, the refinance probably makes sense. If you’re thinking about selling the property later in the year, then you might not proceed with refinancing.