Did you know you can refinance a mortgage on your multifamily property? Refinancing gives you cash to renovate properties and better manage your loan payments. Check out this practical guide on how to use refinancing as part of your investment strategies.
Investing in a multifamily property is a lucrative way to earn a passive income. As a property investor, a wide array of options are available to grow the value of your real estate portfolio.
Selling a property is an obvious option, but selling it as-is may mean you lose out on its full value. If you’d like to make improvements to your multifamily property to raise its value but don’t currently have the budget, your best option would be refinancing. Whether you’re seeking funds for renovations or trying to lower your mortgage rates, you stand to gain from refinancing your investment properties.
What is refinancing?
In a nutshell, refinancing refers to the process of acquiring a new loan to pay off an existing loan. Essentially, refinancing erases your current debt with a new one. Additionally, you don’t have to directly pay off the original mortgage yourself—the mortgage lenders handle everything behind the scenes.
Refinancing helps borrowers save money and grow their portfolio value by allowing them to take advantage of lower interest rates and better loan terms. It’s also a great way to switch from an adjustable-rate to a fixed-rate mortgage, or vice versa, depending on your needs and investment goals.
3 types of multifamily property refinancing
One of the most common types of refinance loans, rate-and-term refinancing allows you to refinance a mortgage by adjusting the interest rate, the mortgage term, or both. In this way, borrowers have the power to tweak the mortgage to fit their economic situation.
If interest rates are going down, you can reduce the interest rate to cut down your payments. If you can afford to pay more, refinancing gives you the choice to shorten the loan term. A shorter loan term means higher interest payments but a smaller interest amount paid throughout the life of the mortgage.
The key feature of cash-out refinancing is that the amount of the new loan is greater than the old loan. The excess between the new and old mortgage loan is then given as upfront cash to borrowers. It’s tax-free because it doesn’t add to the borrower’s taxable income.
With the cash on hand, borrowers can pay down high-rate debts or fund other investment purchases—especially beneficial when interest rates are low or during times of crisis, such as the COVID-19 pandemic.
As the opposite of its cash-out counterpart, cash-in refinancing offers borrowers cash for a new mortgage loan but with a lower balance than the original loan. This allows you to get a shorter term, lower mortgage refinance rate, or both. The primary benefit is the reduction in the loan value, which offers borrowers access to attractive interest rates.
Why should you refinance your multifamily property?
Refinancing offers plenty of benefits both for homeowners and investors:
Lower interest rates
To make mortgage payments realistically sustainable, you can reduce your rates through refinancing. A lower refinance rate means the amount you owe in interest over the lifespan of the loan is reduced. Hence, you’ll be able to manage and pay your mortgage payments efficiently, leaving you with more money to fund other investments or for personal use. Just remember to compare your current rates with what lenders are offering so you don’t end up paying more.
Better mortgage terms
By refinancing, you can negotiate a loan with fewer down payments or shorten the term so you don’t accumulate interest over time. If you have trouble keeping up with the monthly payments, you can also lengthen the loan term to spread out payments and pay less each month.
With refinancing, you can also switch from a variable to a fixed mortgage rate. Property owners may opt for a fixed rate to help them more accurately budget monthly expenses.
Take out the equity
You don’t actually own your multifamily property until the entire mortgage is paid. Typically, a lender will impose a lien on a property until the borrower discharges the mortgage. A lien is a lender’s right to keep the property if the borrower fails to pay their obligation.
Equity is the difference between the amount owed on the mortgage and the property’s current value. Therefore, the more you pay down your mortgage, the higher your equity. That equity will increase in value if the property value also increases but can also drop if the property value falls.
You can borrow the equity and cash out immediately through a cash-out refinancing or commercial real estate equity loan. A cash-out refinance replaces the current mortgage with a new one that’s higher than what you owe on the property. The difference between the two goes to you in cash, which you can use to fund renovations, consolidate debts and other expenses.
Grow your rental income
When you switch to a favorable lender, you may get better terms and interest rates. The money you save can be used to renovate and add value to your multifamily real estate investments. It may seem like you’re adding more debt, but the advantages outweigh all the costs in the long haul. By refinancing your renovations, you can:
- Increase the property’s long-term market value
- Improve relationships with tenants
- Charge more for short-term rent
- See more ROI when you sell
- Boost overall rental income
Ready to refinance?
Refinancing is a feasible option to transform equity on your multifamily property into cash, reduce your mortgage payments or combine other debts. With current interest rates low and more financing alternatives emerging for qualified investors, now’s a great time to consider refinancing. Be clear on your investment goals, and research the best approach to maximize your investments.
If you’re looking for the best refinancing option, MultifamilyDebt.com can help. Complete our quick online application and receive customized offers from our lending partners, or email us at firstname.lastname@example.org.