You’re probably familiar with the term “refinancing” – likely when it comes to your home or car, but did you know proactive refinancing can also be a very effective strategy to create value for your multifamily investment property? If you haven’t done this in the past, you may be wondering what the advantages of taking this step are.
We’re here to break it down for you.
Once you close on a loan, you don’t have to wait until your loan matures to improve your loan terms. Interest rates, loan terms, and underwriting standards are constantly changing, and you can use this to your advantage. Think of debt strategically - not just as a way to help pay for an investment property when you purchase it, but as a way to build equity in your investment without sacrificing liquidity.
Lowering the Interest Rate
Lower interest rates mean more money in your pocket – who doesn’t want that? If you received financing when rates were higher, you’re not stuck. Lowering your interest rate is one of the best reasons to refinance your property. By lowering the interest rate of your loan, your monthly debt payments will decrease, and the cash flow after debt service will increase.
Changing the Mortgage Term
If you’re looking to move to a shorter or longer loan term, you don’t have to wait until your current loan matures to refinance. Loan terms typically range from 5-15 years, so if you’re interested in changing it, you can do it now - all while potentially lowering the interest rate and pulling out trapped equity. Extending your loan term through a refinance is also a sure-fire way to hedge against interest rate risk, which is of particular concern for those faced with a significant principal balance left over at maturity.
A major benefit to refinancing is freeing up some of the trapped equity in your investment property. It’s never a bad thing to have extra cash on hand. This money can be used to return equity to investors, purchase other properties, or even fund improvements at the property – and it’s tax-free! Why not take advantage?
What about Pre-Payment Penalties and Closing Costs?
While there are many benefits to refinancing your investment property, some borrowers have concerns regarding prepayment penalties and closing costs. We get it – it can be daunting to think about additional out-of-pocket costs. When executed strategically, though, the new loan would be structured to cover these costs while also allowing you to potentially pull out equity and lower your monthly payment. Because these costs will be rolled into the new financing, you’ll still walk away with more cash in hand. An all-around win.
You don’t need to wait until your loan matures or the prepayment penalty has gone away. There are a lot of other situations that may make it advantageous to refinance. Let’s say you completed a large renovation project at your property and have increased rents. Or perhaps you’ve signed a few new leases and are receiving more income. Maybe your interest-only period has ended, and now that your loan is amortizing, your payments have gone up. You may want to buy another apartment property and would like to use some of your trapped equity as a down payment.
These are all great reasons to refinance, and it’s never too early to start thinking about it. It’s always better to be proactive rather than reactive. If you’re thinking about refinancing, reach out to an expert that can provide guidance and help you find the ideal time to refinance.