I currently have a 30-year-fixed mortgage for a rental property and I am interested in lowering my mortgage payment with either a new loan product, but I’m not sure if it’s worth the refinance fees.
You are doing the right thing to regularly assess the situation on income and expenses for your rental property. The cost of the mortgage is part of the overall expenses involved in running the small business known as your rental property, and checking your costs and expenses at least once a year should be part of your plan for running the business. Mortgage rates are still at low levels compared to historical averages, so now could be a good time to refinance. And you are right on target comparing the cost to refinance versus potentially lower monthly payments.
Look at your current principle and interest (P&I) payment each month and compare to the new monthly principle and interest on a refinanced mortgage. Be careful in your calculations that you compare the current (old) P&I to the new (refinanced) P&I -- most mortgage lenders you contact about refinancing will give you a quote for just P&I, meaning you need to remove the portion of your current monthly escrow payment that's for property tax and insurance so you get an apples-to-apples comparison.
Calculate the difference between the new, refinanced principle & interest each month versus the old, current P&I. Divide the estimate of refinancing costs from the new lender by the monthly difference between old and new P&I to find the number of months it will take for your savings on P&I to pay for the refinance costs of a new mortgage. If it takes less than 3 years for P&I savings to pay those refi costs, you have a decent deal. If it takes more than 5 years, think long & hard before agreeing to the refi.
Often the best place to start looking for lender to refinance your mortgage is your current mortgage lender or loan servicing company. They already know your payment history, your property, and your financial situation. They could be the financial institution most likely to offer you a free or no-cost refinance deal.
When you look for a new mortgage you may find a variety of interest rates, points, and fees offered by different mortgage companies. Ask the lender if there is a bonus available for you, or if they might receive an incentive payment linked to your refinance: you may be able to negotiate for a portion of the incentive to offset your refinancing fees. A "free" refinance can be tempting, but make sure you compare total costs over the life of the loan. For example, a "no-fee" or "free" refinance that charges an interest rate 0.5% higher and with points added to the new loan might be quite a bit more expensive in the long run than a refinance deal that charges $1400 in fees but with no points and at the lowest interest rate available. In general the loan with the lowest total finance charges (which include interest) over the life of the loan could be your best long-term choice, if the monthly payment fits your budget.
If you originally bought the house and took out the mortgage as your personal residence, the experience of refinancing what is now an investment property will probably be a little different than when you took out the mortgage for a personal residence. The amount of paperwork and documentation you will need to submit for refinancing an investment property is typically greater than for a personal residence. Also, mortgage lenders generally want you to have at least 25% equity in the property. Depending on your particular financial situation some lenders may insist your equity percentage be even higher in order to refinance your investment property. For some borrowers this could mean adding a large amount of their own cash to the deal: a "cash-in" refinance. Although cash that you put into the deal adds to your equity and is still your money, you will have tied up more of your assets in this property. If you are looking at a cash-in refinance consider the alternative investments you could make with that cash. Ask yourself if the cash required to refinance could reasonably earn as much in another investment, and what the risk represented in that other investment option. Comparing cash-in required on a new mortgage versus other investment options can help you determine your best use of that cash.
In general, if you are dropping your rate by at least 1 point and plan to own the property for another 5+ years, I recommend a refi. Zillow has a good calculator you can use to analyze your choices.
Good luck and I hope this helps!
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