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How a Mortgage refinance Can Help Real Estate Investors

By Michele Lerner

Real estate investors often choose to buy and hold property until prices rise and they can make a profit. In the current real estate market, few neighborhoods offer the kind of price increases that make investors hearts beat faster. While homeowners these days are often just relieved if their home has maintained its value or only dropped a little bit, investors are buying property for money, not love.

Depending on location, though, real estate investors have found plenty of opportunities in the market. Two factors are making real estate an attractive investment in spite of sluggish prices: first, investors are often able to take advantage of distressed sellers (either a bank or the owners) who need to move their property fast and are willing to accept a low offer. Second, mortgage interest rates are historically low, making financing far more affordable and therefore creating better cash flow for investors. If you can reduce the size of your monthly mortgage payments you are more likely to cover those payments with your rental income.

Mortgage interest rates have been hovering at their lowest points for months, often less than 5% for a 30-year fixed mortgage. Homeowners and real estate investors should evaluate their current mortgage loan to see if a home refinance makes sense for them. Years ago, the rule of thumb was that the cost of refinancing only made sense when interest rates had dropped at least 2% over the current mortgage loan. Now, many property owners are choosing to refinance when the rates have dropped by 1% or less.

When considering a home refinance you need to determine your goals and decide how long you intend to own the property. If you think you will sell within a year or so, it may not make financial sense to refinance. Typically, a refinance will cost 3% to 6% of the home loan, depending on the closing costs in your area and whether your lender charges you points. A lender can quickly tell you how much a refinance will cost and whether you can wrap those closing costs into your new loan. A simple math equation will show you how long it will take to recoup those costs from your savings on the loan. For example, if your refinance costs $2,000 and you are saving $200 per month over your previous mortgage payments, it will take you 10 months to recoup your costs.

For most people, the goal of a refinance is to reduce your monthly costs, but some property owners are opting to refinance into a shorter loan so that they can build equity faster. A 15-year home loan typically has a lower interest rate by ½ or sometimes ¾ percent than a 30-year loan. Investors may want to consider a shorter loan so that by the time they are ready to sell the property they can realize a higher profit.

Meet with a lender to see if a home refinance can create better cash flow, particularly if you own several properties. Reducing your monthly payments by $100 may not seem like a lot, but if you can do that for three or more properties your budget will benefit.

Michele Lerner, a real estate expert and freelance writer with 20 years of experience, is the author of “HOMEBUYING: Tough Times, First Time, Any Time”.
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