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How To Refinance An Investment Property – Forbes Advisor – Forbes

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If you own an investment property that earns you rental income, odds are you might be able to refinance into a lower interest rate, especially if you’ve been paying a mortgage on the property for several years.

With mortgage rates still at affordable levels, you might be able to lower your monthly payments. Given this is not your primary residence, refinancing an investment property will not work in the exact same manner. Your lender might have a more stringent set of requirements for you to meet, and additional documentation might be needed.

Here’s how to refinance an investment property in three steps.

1. Consider If Refinancing Is Right For You

As the owner of an investment property, your reasons for refinancing will be very different from the average homeowner. Here are some good reasons for refinancing an investment property.

  • You can change the loan terms so that the repayment period is longer, thereby slashing your monthly payments. Or you can shorten the repayment window to pay off the debt faster.
  • If you’ve accumulated equity in the property over several years, you can refinance for a higher amount than you owe on the original mortgage. This cash-out refinancing frees up funds to cover other large debts or personal expenses.
  • The money from the refinancing could be used to pay for home improvement projects in your investment property. This would increase its value and boost its appeal to potential tenants.
  • You can also use the cash from the refinancing as a downpayment to buy another investment property.

Questions to Ask Yourself

Before applying for a refinance, here are some things you should ask:

  • Will refinancing help achieve your financial objectives?
  • Does your current lender have a prepayment penalty?
  • Have you built up enough equity in your home to make refinancing worthwhile?
  • Do investment property refinance rates offer savings over your current rate?
  • Do you plan to own the property for a long time?

2. Do the Math Before Applying for a Refinance

Before you make the decision to refinance any property, you should run the numbers on the length of time it will take to break even on the transaction. Start by researching refinancing rates from various lenders (at least three) to confirm you can secure a lower rate than what you are currently being charged on the original mortgage loan.

You can then calculate the refinance break-even point by factoring in all the upfront costs of refinancing the loan—the lender’s fees plus the other closing costs—against how much you would save each month. Comparing these numbers will help determine approximately how long it will take to break even and begin saving money.

If you have no intention of owning the property for that length of time, then refinancing the investment property does not sound like the best financial move; it will cost you more than the savings you can extract.

3. Refinance Your Investment Property

Once you have decided that refinancing is a good option, there are some steps you will need to take in order to get approved by your lender.

Prepare Your Documentation

  • Proof of income. You should typically have pay stubs for the last 30 days.
  • Homeowners insurance. All mortgage lenders will require this to ensure your investment has current and adequate coverage.
  • Tax returns and W-2 forms. Required to help verify your employment and income history. If you are self-employed, the lender will also require recent tax returns and bank statements.
  • Asset information. Account statements for brokerage, checking, savings and 401(k) accounts. The lender needs to be confident you can cover the closing costs as well as future unforeseen expenditures.
  • Title insurance. Your lender will use this to verify taxes, ensure your name is on the title and confirm the legal description of the property.
  • Rental agreements. This helps the lender evaluate the profitability of your investment property or properties.
  • Appraisal. During the refinancing process, your lender will order a property appraisal to evaluate its current value and ascertain its rental income potential. They also want to know if the home has enough equity to qualify for refinancing.

Lenders’ Refinancing Requirements

In order to get approved for refinance, the lender will look at your financial profile to make sure you can prove your ability to repay the mortgage. Though requirements may vary with lenders, they typically require the following.

  • Your equity exceeds the loan amount. When refinancing a rental property, the bank will check that the value of the property is more than the current balance on the mortgage. Lenders prefer you have at least 25% equity in the home.
  • Credit score. Most lenders will approve your refinancing application with a credit score of at least 640, but a score of at least 680, in the good or excellent range, will often get you a lower interest rate.
  • Cash reserves. You will likely need to have cash that equals up to a year’s worth of mortgage payments. The minimum required amount will be calculated based on your new mortgage payments, and if you own other properties.
  • Eligible income. Your income will also impact your odds of success. Beyond the income coming from the rental property itself, you will likely have to show other earnings to assure the lender you can easily cover the monthly payments, especially when the property is not rented out.
  • Debt-to-income (DTI) ratio. The bank will want to verify that you aren’t loading yourself up with too much debt. This is calculated by dividing your total monthly debt payments by your monthly income. Typically, you’ll need a DTI under 43% but no more than 50%.
  • Closing costs. Average closing costs on a refinance are approximately $5,000. The size of your loan and the location of the property will significantly impact how much you pay. These costs are very similar to what you paid when you purchased your home, including the mortgage origination fee and other charges.

Best Mortgage Refinance Lenders of 2022

Find the best Mortgage Refinance Lenders for your needs.

Keys to Refinancing Your Investment Property

As with any mortgage or refinance, it’s crucial to shop around since some lenders might offer you a lower rate or no fees to gain or keep your business. Make sure you understand your financial situation and credit profile ahead of time since this will help the lender give you a more accurate quote from the start.

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Economy

Energy stocks help lift S&P/TSX composite, U.S. stock markets also up

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TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.

The S&P/TSX composite index was up 34.91 points at 23,736.98.

In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.

The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.

The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.

The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.

This report by The Canadian Press was first published Sept. 17, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

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TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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