Refinancing your Austin rental property can be a great way to lower your monthly payments, increase cash flow, or access equity you’ve built over time. However, it’s not something you should jump into without understanding how the process works–or whether it’ll actually benefit your investment. Today, we’ll review what it means to refinance, when you may consider it, and how the process works.
What Does It Mean to Refinance a Rental Property?
Refinancing a rental property involves replacing your current mortgage with a new loan–usually one with better terms, a lower interest rate, or a higher loan amount. When you refinance, your new mortgage pays off the balance of your old one, and you start making payments on the new loan under new terms.
Investors may decide to refinance for many reasons, mainly to reduce monthly payments or switch from an adjustable-rate to a fixed-rate loan. Refinancing can also allow you to access your equity to fund renovations or buy additional properties. If you work with an Austin property management company, they can help you determine whether refinancing aligns with your investment strategy.
Main Types of Refinance Options for Rentals
Rate-and-Term Refinance - This is the most common type of refinancing, and gives you the option to replace your existing mortgage with a new one that has a lower interest rate, a different term, or both. If you want to pay off your loan faster, this is a great way to do so.
Cash-Out Refinance - This refinancing option allows you to tap into your home’s equity by taking out a loan for more than you owe and receiving the difference in cash. This is great for rental owners looking to use this money for renovations or to purchase additional properties.
Cash-In Refinance - With this refinancing option, you pay a large amount to lower your loan balance. In turn, this can help you qualify for better terms and/or lower your interest rate.
Signs It Might Be Time to Refinance Your Austin Rental
Austin’s rental market is always changing, so it’s important to stay ahead and know when (and if) refinancing your mortgage is a good move. Obviously, this isn’t something you’ll want to do on a whim, but there are some clear signs that it might be beneficial for your circumstances. Here are some of the most common situations where refinancing may be worth considering.
Your Interest Rate Is Too High
The Value of Your Property Increased
You Want to Maximize Cash Flow
Your Loan Has an Adjustable Rate
You Plan to Renovate or Add Value
Your Interest Rate Is Too High
If your current mortgage rate is higher than today’s market rates, refinancing can significantly lower your monthly payments. That said, even lowering your payments by a little can increase your rental cash flow by a lot, which might be necessary as operating costs rise in Austin. With that in mind, lowering your interest rate makes it easier to stay competitive while protecting your overall returns.
The Value of Your Property Increased
Homes in Austin have grown steadily in value over the past decade, and even with market shifts, many landlords still have a decent amount of equity. That said, if your rental property has appreciated in value, refinancing can help you tap the equity you've built for renovations or other investments.
You Want to Maximize Cash Flow
If expenses like taxes, insurance, and maintenance are eating into your profits too much, refinancing your mortgage can help reduce monthly costs. A lower interest rate or longer loan term can free up extra cash each month, giving you some flexibility. This can be especially helpful when preparing for off-season or covering emergency repairs.
Your Loan Has an Adjustable Rate
Adjustable-rate mortgages can be very unpredictable, especially in volatile markets. So, if your rate is set to increase soon, refinancing your mortgage to a fixed-rate loan gives you more stability. Having consistent monthly payments can help you budget better and plan for long-term expenses.
You Plan to Renovate or Add Value
If you’re considering making upgrades to your rental property, a cash-out refinance can give you the funds you need to do so. Whether it’s updating the kitchen, replacing flooring, or adding smart-home features, renovations can increase the value of your property and attract higher-paying tenants.
Pros and Cons of Refinancing Your Austin Property
Refinancing can be a great way to lower your monthly payments or use your equity to expand your rental portfolio. However, it’s not always a perfect solution. Here are some of the pros and cons to consider before refinancing your rental property’s mortgage.
Benefits of Refinancing Your Austin Rental
Lower Your Interest Rate - Refinancing can give you a lower interest rate, reducing your monthly payments and improving your cash flow.
Switch to a Better Loan Structure - Moving from an adjustable-rate loan to a fixed-rate loan gives you more predictable payments, making it easier to plan for other expenses.
Ability to Fund Upgrades or Other Investments - A cash-out refinance lets you use the equity you have to renovate your rental or purchase another property.
Disadvantages of Refinancing Your Austin Rental
Closing Costs May Be High - Refinancing a mortgage comes with fees that may outweigh the benefits if you don’t plan carefully.
Potentially Higher Monthly Payments - Certain refinance options, like cash-out loans or shorter terms, can actually raise your monthly payment instead of lowering it.
Not All Properties Qualify - Unfortunately, investment properties usually have stricter lending requirements, making it harder to get approved.
Steps to Refinancing Your Austin Rental Property
Refinancing your mortgage loan is not something to take lightly. It’s crucial to do your own due diligence and evaluate your circumstances to make sure it’s a smart idea.
Decide Why You Want to Refinance - It’s important to have a good reason to refinance. So, whether you want to lower your mortgage rate, shorten your loan term, or tap into equity for improvements, have a goal in mind before starting the process.
Know the Requirements - To qualify for refinancing a rental home, there are several requirements you’ll need to consider. For instance, lenders usually look for at least 25% equity, a stable debt-to-income ratio, a high credit score, and more.
Compare Rates and Choose a Lender - Experienced investors know not to settle with just one quote from one lender. You’ll want to check with at least three to five different lenders to get the best refinance rates at the lowest closing costs.
Get Documents Ready - Along with the standards documents you need, like pay stubs and W-2s, you’ll need others as well, including tax returns, mortgage statements, current leases, and more.
Close on Your New Loan - Once your paperwork and the property have been evaluated, you’ll get approved by your lender, and you can close on your new loan. Keep in mind that the process of being approved might take longer, as there are more documents to review.
Trust Your Rental Properties With Stone Oak
If you’re looking to refinance your Austin rental property, it’s important to know when and how to do so. The process can be lengthy and may only be worth it in certain scenarios. So, evaluate your goals and your current mortgage status to make the best decision for your investment.
If your goals include focusing on improving your property maintenance and management, it may be time to hire professional help. Our team of property management professionals at Stone Oak can help you through every step of the rental process to help you achieve your goals. Contact us today to learn more about our comprehensive management services.
