Refinancing your home to buy an investment property can be a smart financial move. Refinancing works by replacing your current mortgage with a new one, and in that process, access to the equity may be attained. If your property has appreciated or if you have paid off a large percentage of your loan, you might qualify for a cash-out refinance. These funds can be utilized for a down payment or to purchase an investment property.
Before doing so, make sure your financial situation supports the additional debt, and consider current interest rates. It’s also beneficial to consult with a mortgage broker in order to understand eligibility and risks.
Can I Refinance My Home To Buy An Investment Property?
Yes, you can refinance your home to buy an investment property. By tapping into the equity in your primary residence, you can access funds to use as a down payment or even cover the entire purchase. This approach requires a solid financial standing and careful planning to ensure favourable terms.
How Refinancing Works for Investment Properties
Refinancing allows you to leverage some of that equity you have built up in a home. Let’s say your current home is valued at $800,000 and you owe $400,000 on your mortgage, you may be able to refinance and pull out a part of the $400,000 difference, known as equity. Lenders generally allow you to borrow up to 80% of the value of your property, making you able to access funds for an investment property.
Pros and Cons of Refinancing
Pros
Access to Funds: The refinancing option allows access to capital without having to sell your primary home.
Potentially Lower Interest Rates: If interest rates have dropped since you originally took out your mortgage, refinancing may lower the overall cost of your borrowing.
Investment Growth: Buying an investment property provides one with an opportunity for rental income and capital growth.
Cons
Higher Debt Exposure: The higher the loan taken, the higher the overall debt, which can be riskier if property values slump or rental demands drop.
Closing Costs: Some refinancing involves fees, which can add up; therefore, it is always important to ensure that the long-term benefits of this outweigh the costs.
Market Risks: There is a risk that the investment property may not perform as expected due to market conditions or because it might be challenging to obtain tenants for your property.
Steps to Refinance
Evaluate Your Current Mortgage: Check your balance, interest rate, and remaining term.
Check Your Home’s Equity: Determine the market value of your home to see how much equity you are eligible to access.
Shop for Lenders: Compare rates and terms from several lenders to find the best option for your refinance.
Apply for Refinancing: Once you have chosen a lender, fill out an application, and go through with your approval process.
Use Funds for Investment: Use the funds drawn to make the down payment or pay in full for the investment property.
Refinancing your house to buy an investment property can be a smart financial decision. However, it’s important to assess your financial situation and the risks involved before proceeding. Given that you’re working with a professional and you ensure that you carefully consider the terms involved, you might be in a position to benefit from lower mortgage rates with new property investment.