One of our goals for 2013 was to refinance the high interest loan on a rental property we built several years ago. With interest rates now at historical lows, we wanted to switch out the existing 7.5% mortgage for a better rate. To reach that goal, my husband and I spent the past year into maneuvering ourselves in the best possible position for refinancing this rental.
Here are several of the strategies we employed.
Lower monthly rental expenses. Up until 18 months ago, this rental had been a drain on our finances. A new lease, higher deposit, and new tenants solved this problem. To stretch the savings even further, we made all of our own repairs in 2012 and called in the pros only when absolutely necessary. Lowering our monthly rental expenses meant that the rental would not be seen as a financial drain on our income statement when it came time to refinance.
Lowered our monthly debt. We also implemented a "spending freeze" for several months with the goal of lowering our monthly debt. We were able to reduce our overall consumer debt by $8,000 plus had the ability to cash flow (instead of charge) an unexpected home repair. Lowering our monthly debt had the effect of increasing our income.
Socked more into savings. To cash flow unexpected expenses and save for one-time costs like income tax and property taxes, we began to divert money into a savings account. I also plowed extra money into my IRA. This ended up being a doubly smart move for us because we learned during our refinance that lenders are now requiring 6 months (or more) of house payments in a savings or retirement account as part of a condition of approval.
Avoided the temptation to open new credit cards. Many lenders view credit cards (even those with zero balances) as a liability because of the potential to charge is there. We cancelled one of our high interest cards this year and said "No" whenever a store clerk asked if we wanted to open a merchant card for an instant 15% savings.
Boosted our income. The last step in prepping our self for a refinance was boosting our income. Both my husband and I picked up a little extra work this year to help lower our monthly debt. The added income also helped improve our debt-to-income ratio as well.
Despite low interest rates, refinancing an investment property is even tougher than it was two years ago. These five strategies made a big difference in qualifying for a refinance on our rental home.
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