Did you know you can use the mortgage refinance of your current home to buy another property, such as a vacation or rental property?
Using the equity you’ve built up in your home toward the down payment of an investment or other property is a low-cost, low-stress way to get the money you need to grow your investments.
When to refinance your mortgage?
With interest rates at a historically low level, it’s a great time to take advantage of a mortgage refinance to buy an investment property, a vacation residence, second home, or other property.
The term “mortgage refinance” simply means paying off your current home loan and replacing it with a new mortgage. Because you can use some of the money you’ve paid into your current house, your new mortgage refinance loan will be for more money than your initial mortgage. You can use these additional funds toward the purchase of your new property.
Interest rates are always important to consider when thinking about a mortgage refinance. The lower the interest rate, the more money you stand to save. Interest rates for a mortgage refinance on your primary residence will typically be less than interest on an investment property. Through a cash-out mortgage refinance loan, you can typically get up to 80% of your home’s value.
Another option is to keep the current mortgage on your primary residence and take out a second home equity loan to help you buy your second property.
Home equity loans use your home’s equity as collateral to get access to your home’s value as money. Home equity loans are often provided as a single lump sum loan payment or a credit line that you can use at your discretion over a set period of time. Home equity loans can have more challenging eligibility requirements compared to a mortgage refinance loan.
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How to refinance your mortgage?
Let's look into some of the key steps involved in refinancing your mortgage.
Start by asking yourself why you want to refinance
The decision to refinance should always be accompanied by careful consideration. Understanding why you want to purchase a second property can help you determine whether it's the right decision for you and your family.
Are you looking to grow your investment portfolio? Are you interested in purchasing a retirement or vacation property? If you're having difficulty determining why you want to refinance, speaking with a mortgage refinancing professional, like the regional loan specialists at River City Mortgage can help you explore all the options you have available.
Know your credit history and score
Qualifying for a mortgage refinance means meeting the loan requirements in much the same way you did for your initial loan. The better your credit history and score, the better your chance for a mortgage refinance approval.
Additionally, your higher credit score can translate into getting a lower interest rate. To check your credit history and score before applying for a mortgage refinance, credit reporting agencies like Equifax offer free credit reports to consumers.
Find out how much home equity you have paid into your home
Your home's value, over and above the amount you still owe on your mortgage, is referred to as your home equity.
To determine how much home equity you have accumulated, start by checking your most recent mortgage statement. Next, check your most recent assessment or check out a local area real estate website to get an idea of your home's resale value. Your home equity is the difference between both numbers. If your home is worth $300,000 and you still owe $200,000, you have built up $100,000 of home equity.
A quick phone call to your mortgage refinance specialist is a wonderful way to determine how much equity you've accumulated in almost no time.
Gather financial documents
Assemble any documents that can confirm your financial situation. Pay stubs, bank statements, federal tax returns, and credit card statements, and credit reports are all excellent choices. These documents assist your lender in getting an accurate idea of your financial situation.
Have a home appraisal done
You may need to have a home appraisal done on your primary residence to get a mortgage refinance loan. A home appraisal helps determine your home's current fair market value and can be a valuable tool when calculating your home equity.
Why refinance your mortgage to buy another home?
When you refinance your mortgage to buy another home, you can do the following:
- Take advantage of lower interest rates. Lower interest rates are one of the most popular reasons homeowners consider mortgage refinance. A reduction in how much interest you have to pay can result in a lower monthly mortgage payment.
- Get tax breaks. Tax initiatives such as expense deductions, including interest payments on home equity loans and property tax deductions, can save you money at tax time and throughout the year.
- Earn additional income. If you rent out your second property for short-term (vacation rental) or year-round with a full-time tenant, you can supplement your finances with rental income.
- Avoid paying closing costs. While there are closing costs associated with most mortgage refinancing loans, many lenders will allow you to roll those costs into the total loan amount. This means you can refinance your primary home without paying any cash out of hand.
And don't overlook the valuation appreciation that can occur with your second property. The second home you buy today for $150,000 could be worth $250,000 by the time you decide to sell it.
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Our mortgage calculators are for informational purposes only. The best way to understand your personal mortgage options is by talking with a professional loan officer.
Buying a second home, an investment home, or a vacation property can be an excellent way to maximize your home equity and make it work for you. Your second property's assessed value can often increase faster than your primary residence. This can contribute to raising your overall net worth more rapidly and help put your finances in an even better position for additional future investments.
For more information on how you can use a mortgage refinance loan to buy another home, reach out to the regional loan officers at River City Mortgage. We're ready to sit down with you and go over all the details. We want to help you make the best decisions for your family and your financial well-being. Get in touch today.