Refinancing rental property can be a smart move to reduce your interest rate and monthly payments so that you can enjoy more cash flow and rental profits month to month.
Another way that you can benefit from refinancing rental property is to do a cash out refinance to tap into your property's equity. This is a way for you to get you hands on ready cash without having to sell the property and more importantly, without having to pay capital gains taxes.
Refinancing Your Rental Property to Enjoy Lower Mortgage Rates
With a conventional refinance, you simply choose a new lender who will pay off your old housing loan. You'll owe the remaining amount to the new lender at a lower interest rate.
The key to benefiting from refinancing rental property is to do it at the proper time. Let's assume, for example, that you owe $50,000 on a rental property valued at $150,000 and your interest rate is 7%. Since you purchased the property, interest rates have fallen to 4%.
You could do a straight rental property refinance and take out a new loan for $50,000 at 4% interest. Your mortgage will be significantly lower, but your tenants are still paying the same monthly rent. This translates to extra cash in your pocket each month plus less total interest paid over the life of the loan.
Refinancing to Cash Out Money from Your Rental Property's Equity
Instead of borrowing the exact amount you owe from the new lender, you can actually borrow more. Returning to the same example above, let's say you still owe $50,000 on your property that is worth $150,000. You can choose to borrow $100,000 instead and walk away with $50,000 in cash.
This is a great way to access the equity in your property if you don't want to liquidate and sell off the asset.
If you are thinking that this will increase the amount of interest you pay over the life of the loan, you are correct. But do realise that this is offset in part by your renter's payments and you could very well make other investments with the cash you pocket. Best of all, you won't have to pay a single in capital gains taxes.
Which Type of Refinancing is Right for You and Your Rental Home?
Refinancing rental property to lower your interest rates and monthly mortgage payments idea if you don't need the extra cash or if your goal is to pay off the property quicker and owe it debt-free.
On the other hand, a cash out refinance is a smart move if you need the cash to pay off other high interest debts such as credit card bill or car loans. You can also reinvest cash in other investments or spend it for your own enjoyment such as a new deck for your house or a family vacation.
