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Getting the money together to make a down payment on investment property can be challenging for some. The method of payment that you use to pay all or a portion of your down payment is crucial to your financial stability. It has become quite common in recent years for new and experienced investors to experiment with alternative sources of funding. Things like a self-directed 401k, self-directed IRA and private money lenders are helping more people to become property owners.
If you finance your investment property, at some point in time you will likely ask the question "can you refinance your investment property?" It is natural to ask this question and many property owners seek a refinance.
Refinancing Your Investment Property
When you are considering this option, you must understand the undertaking of a bank or mortgage lender. You have a passive income property that has no guarantee that the loan will never be repaid. Because of this threat, lenders and banks are now limiting the amount of money that is available for a refinance. The term loan to value might be new to you although it has been used in real estate for decades. This phrase centers around the current value of a property compared to the loan amount requested. Lenders are paying a lot more attention to the LTV ratios than in previous years. Most lenders now have a LTV of 75 percent or less.
This means that when you request a refinance you will likely receive 75 percent of the appraisal value of the property. This number is on the high end and some investors might only receive 25 percent. Personal credit scores and unsecured debts are always a factor in getting approval for an investment property refinance. A lender in today's economy will likely limit or refuse to lend you money if your debt to income ratio falls below a predetermined threshold. It is possible however to refinance your investment property at a lower rate to cash out your equity.
The Importance of Refinance Interest Rates
An examination of your current interest rate will interest both you and your lender. Depending on the original rate, you may not qualify for a refinance because the lender may lose money. Although interest rates are now historically low, when the rates do rise in the future a bank still must honor a low refinanced rate. This could cause a lender to lose money on the original agreement. A careful review is made of future economic conditions, your credit and employment and the actual income received from your property before a final decision is made.
A refinance is not something that takes place overnight and you hear an answer in the morning. It could take a lending institution several weeks before you are notified of a yes or no. Holding the keys to an investment property is exciting and one of the greatest thrills in life. Getting the equity out of the property to make repairs or to invest the cash in a second property is an important decision. You can refinance investment properties if you understand how the decisions are made and what you could stand to lose.