With interest rates staying low and lenders rolling out new refinancing plans to court anxious homeowners, is this a good time for investors to refinance rental property too? Although most new incentives for refinancing are directed at residential homeowners, investors, too, may find that refinancing in the current climate can save money and yield some tax breaks too.
While rates are low and the housing market appears to be improving, albeit with some artificial interventions, creditworthiness is even more important for financing — and refinancing -— properties. Because the housing collapse of a few years ago was triggered largely by subprime mortgages to risky borrowers, lending standards have tightened, with more stringent criteria for both residential homeowners and investors.
Some homeowners who qualified for a mortgage to purchase a house are finding that thanks to financial downturns in the meantime, they don’t qualify for refinancing under current guidelines, even though they had no problems with the original mortgage. A new requirement by Fannie Mae requires loan servicers to factor in the probability of “future serious delinquency” rather than outright defaults in determining whether to approve refinancing.
Some lenders consider investment properties to be riskier than residential homes. Because of this, investors may be required to meet other criteria such as having equity of at least 20 percent, or more likely 25 percent, and six months’ worth of cash reserves on hand as well when seeking refinancing. Debt to income ratio must also generally be lower than that required for residential home financing.
Another issue affecting the decision to refinance involves the upfront costs of the process, which include appraisals and transaction fees. Depending on the property and the lender, these costs can run into thousands of dollars, and financial experts say that if an investor doesn’t plan to hang onto the property for more than a few years, the savings gained by refinancing may not be significant enough to offset those additional fees.
An investor’s overall financial situation is also fair game in the refinancing process – not just where a homeowner stands on managing payments on the investment property but also on a primary residence as well. The investor’s relationship to the property is also a factor: is the property used solely for investment purposes, with a rental income covering the mortgage, or is it also a residence for the investor, such as a unit in a multiplex or a portion of a house?
Refinancing can also affect an investor’s tax returns. A number of tax benefits, including mortgage interest, are available to both residential homeowners and investors, and a refinancing that changes the numbers may also affect the deductions claimable for owning and maintaining a property.
Even though interest rates on investment property may run somewhat higher than the absolute lowest rates now trending, financial experts point out that for those who qualify under the new lending standards, now is still the time to “refi till you die,” as Jason Hartman advises newcomers to investing in income property.
The Jason Hartman Team