Should You Refinance While Interest Rates Are Low?

It's common knowledge that the interest rates on real estate loans have plummeted. I've been a licensee since 1969, over 50 years now. The first 32 years I never saw an owner-occupied, 30-year fixed-rate starting with a number lower than 7 percent. Yet, all was well, and business was good most of the time. It never occurred to me rates could even get this low—silly me.

What are rates these days? Try 2.5 percent for primary residence, and, depending on the day, around 3.5 percent—occasionally lower—for two to four residential income units. Since this was written, rates have inched up just a bit. That said, a homeowner in Houston, Texas, last week locked in 2.5 percent! Are you kidding me?

3 Reasons to Refinance 

I can’t understand why lenders aren’t doubling their workforces. Why isn’t almost everybody refinancingthese days? Sure, there are legit reasons not to refinance. In fact, I’ve advised many of my clients to stand pat. But the typical homeowner and investor should right now be crunching the numbers to learn if they’re missing the boat.

Of course, this assumes you can qualify for the loan to refinance. Besides the obvious perk of a lower payment, why should you take this seriously? Allow me to provide some reasons.  

1. Lower Payments

This is obvious, but needs to be stated: Your payments are lower. Lower payments can help families budget at the best level. Furthermore, the net check from escrow in 5-10 years will be higher—often a lot higher. Increasing your net check upon sale while lowering your payment? Sign me up!

2. Potential Savings 

Many who’ve bought their home or invested into residential income real estate, especially the one to four unit variety, are amazed at the results of their potential refinance. They’re saving more than just a payment.

3. Extra Cash 

These days it’s amazing how often a homeowner or investor can both lower their monthly payment while also taking cash out for themselves. Did I mention the cash taken in such a loan is tax free nearly every single time? Yep, it is.

Consider the Type of Loan

You have a loan that isn’t a 30-year, no call with fixed-rate interest. It could be the dreaded 15-year loan. More likely though it’s a 30 due in 5, 7, 10, or 15 years. Lately, it’s been making you more than a little nervous, what with all that’s going on.

I know all the reasons these loans sounded good to you. I realize you thought long and hard before deciding. Here’s the hard truth about those loans: They’re poisonous to the vast majority of borrowers. Period.

Sure, a 15-year loan will halve the time it takes to get free and clear. It’s far and away better to pay a little more interest, but pay the loan down as if it’s a 15-year loan.

Tell me what you’d have done around 2007 when the bubble burst and your house is now either underwater—or close enough. Or those poor borrowers whose loan came due between  2007 and 2011, and they simply had three hard choices: Pay the loan off, sell the property, or lose it.

Here’s a lesson I learned over 40 years ago. With a few exceptions, never take the options off your side of the table. When you gamble that nothing can happen to your family’s income, then it does? Uh oh.

Then there is that enticing equity loan you put on the family castle a few years ago. The vast majority of these loans, maybe up to 80 percent of them, have a 10-year life. You think, but the interest rate was so low, relatively speaking, at the time. Good luck explaining to your family when it’s due and you have no way on earth to refinance it. I think the technical term used these days is screwed.

In Conclusion...

I have several clients who’ve not only begun refinancing their loans on investment properties and/or homes, but know in advance that their net tax free cash out will be in six figures. Oh, did I fail to mention their payments went down too? Not. Kidding.

I have several clients who’ve not only begun refinancing their loans on investment properties and/or homes, but know in advance that their net tax free cash out will be in six figures. Oh, did I fail to mention their payments went down too? Not. Kidding.

There’s gotta be a saying better than, having your cake and eating it too, right?

Remember what happens when the monthly payment on your investment loan(s) goes down? Bingo! Your cash flow goes up. Who knew? For more information on re-financing or any other real estate questions you may have, please reach out to us at [email protected]!

This article is brought to you by Jeff Brown with BiggerPockets.com