What does it mean to refinance a real estate loan?
Refinancing a real estate loan means you are replacing the current loan with a new loan. Investors do this to attain better terms for their loan.
When should you refinance your loan?
Investors should only look to refinance their loan when the market is offering lower interest rates. Investors shouldn’t refinance their loan if the market is charging higher interest rates. Why do interest rates rise and fall? Interest rates increase when lenders believe market conditions are risky and they decrease when lenders believe market conditions are less risky.
What are the advantages of refinancing?
Investors can benefit tremendously from refinancing their loan as the market can offer lower interest rates that will allow the borrower to pay less in interest and more towards the principal. Refinancing could also allow a borrower to increase their month-to-month profitability and return on investments.
Investors will also benefit from refinancing as it allows investors to cash out on the property’s equity. The investor can use the cash to rehab/renovate the property, acquire more properties or put it towards the new loan. The investor can increase his rental income with the cash if the investor uses the cash to add an additional unit to the property.
An investor from Italy financed a real estate rental portfolio at an interest rate of 6.5% in 2017. Today the investor is able to lock in an interest rate of 4.1%. In this case, the investor should refinance the properties as the portfolio will benefit from the new and lower interest rate.
The investor will walk away with an interest rate 2.4% lower than the previous interest rate. This will allow the portfolio’s return on investment and profitability to increase and the risk to decrease.