If you are considering refinancing your existing rental property, there are a number of factors to consider before committing to take the plunge. One simple alternative can streamline the process and save a considerable amount of money.
Firstly, you should honestly evaluate the current value of your property before going any further. Real estate prices have fallen universally since the end of the housing boom several years ago and are severely depressed in some regions. Having no intention to sell their properties, many investors have not adequately followed the market and may be surprised by how sharply the prices have dropped in their area. Check your most recent tax statement and do not expect the fair market value to be much above that. If there is any doubt, consider commissioning an independent appraisal of the property. While this will cost a bit, the bank is going to require it as part of the mortgage application process anyway and, if you use an appraiser acceptable to them, they will most likely accept the value provided without demanding an inspection of their own. If you find that your current equity is not much over 20%, there is little point in going forward with a refinance deal, as most banks will not lend more than 80% of a property’s value.
If this is your situation, you might consider a refinance of your home instead. Remortgaging a residential household has several considerable advantages over a commercial rental property. First, the interest rate is always going to be lower for a home mortgage as opposed to a rental, often by several percentage points. Secondly, there may be considerable tax benefits you can receive from interest paid for a residence as opposed to an investment property. Banks are also more willing to lend against a home as opposed to an investment in which the lender may be more willing to give up and allow foreclosure.
Whichever way you choose, you will almost always have more leverage if your home loan and your rental mortgage are held by the same bank. If this is currently not the case, allow the two institutions to bid against one another for your business and go with the one offering the best overall deal.
