Avoid getting trapped by high interest rates when you understand the hard money loan refinancing process. After getting a hard money loan, many borrowers opt to refinance the loan rather than pay it off till the end. If you’re a new investor, replacing your existing debt with a different one might seem like swapping your obligations for the same set. When you do it the right way, it can be an excellent way to save more money through lower interest rates, or at least buy yourself some more time with a longer repayment period. 

On the other hand, a misstep could make the refinancing process more expensive and cost you more money in the long run. Rather than letting you run the risk of losing your home or financial investment, we’ve put together this guide on refinancing options to help you:

Common Refinancing Options for Real Estate Investors

• Conventional Mortgage

Go traditional by opting for a conventional mortgage to refinance your hard money loan. One of the reasons investors often choose the latter over the former is that hard money loans have a swifter approval rate, allowing you to seize time-sensitive real estate opportunities. However, their interest rates make them more expensive than conventional loans. After securing your property, if you have a good credit score, wait for the bank’s approval and swap to a traditional lender. Aside from that, a conventional mortgage also has the added benefit of being long-term, which is a more befitting timeline if you plan to keep the property as a rental or hold for some time before reselling. 

• Cash-Out Refinance

Use your property’s equity to get extra cash you can use for additional investment. If you’re looking to enhance your property’s value by making repairs and funding major renovations, you may prefer to opt for a cash-out refinance. This option involves replacing your existing loan with a new one by borrowing against the property’s equity. It is more popular among investors who want to grow their portfolio aggressively and need capital. You can also use that extra money to expand your portfolio by making a down payment on another property. Work with experienced private money lenders in Maryland to ensure you can maximize the returns on your investment after refinancing.

• Bridge Loan

Minimize disruptions in your cash flow while you finalize the sale of your property by opting for a bridge loan. After purchasing a house with a hard money loan, it’s common for investors to do a fix-and-flip, where they make minor cosmetic changes and resell it for a profit. However, unforeseen events can delay your renovations, forcing you to hold on to the property before you can find a buyer. Instead of missing your repayment deadline, switch to a bridge loan that can provide you with the funds for your improvement and more importantly give you some financial relief between the buying and selling process.

Potential Benefits of Refinancing a Hard Money Loan

Lower Interest Rates

Enjoy lower interest rates when you refinance your hard money loan, especially if you opt for a conventional loan. Despite having a lower barrier for eligibility and a faster approval time, hard money loans can quickly deplete your funds because of their high interest rates. Refinancing your loan can give you the option of financing at a lower interest rate, which improves cash flow and can make it easier to manage your other financial obligations.

Longer Terms

Extend your repayment timeline with a traditional or bridge loan that gives you more time to meet your financial obligations. One of the major drawbacks of hard money loans is that they’re often short-term, giving investors only 6 to 18 months to turn a profit after purchasing a property. On the other hand, refinancing your loan with a long-term option can give you more time to meet up with the deadline. For example, traditional loans can span from 15 to 30 years, which also reduces your monthly payments and offers you more financial flexibility. 

Cash-Out Options

Tap into your property’s equity to expand your portfolio. If you’re looking for a strategic way to grow as an investor, cash-out refinancing can help you secure funding to buy additional properties or improve your current one with cash for renovations. For example, rising interest rates can have a positive effect on your real estate investment by reducing the competition for new properties. Thus, you can use the extra money from your cash-out refinancing to secure properties at a lower cost, even when it seems the market is hostile.

Potential Drawbacks of Refinancing a Hard Money Loan

Costs Associated with Refinancing

Calculate the fees associated with refinancing to ensure the extra cost doesn’t negate the benefits. Aside from the upfront fee of a new loan, closing fees, appraisal costs, and other expenses can quickly increase the total cost of refinancing your loan. It would be best to evaluate how much you’d need to spend in fees to refinance your loan and weigh it against your potential savings. 

Eligibility Requirements

Consider whether you meet the qualifications for other refinancing options, which might have stricter eligibility requirements. For instance, traditional loans are often tougher to secure because banks prefer borrowers with a good credit score, steady income, and stable property conditions. Thus, if you’re unable to meet their criteria, you may have to stick to the terms of your hard money loan or consider another refinancing method.

Conclusion

Exploring the option of refinancing your hard money loan may be worth the trouble, especially if you know what to expect. You could even use it to improve your rental property, such as with a cash-out refinancing option that gives you some extra cash you could put towards your renovation. Also, opting for a conventional mortgage could allow you to enjoy lower interest rates and more time to pay off your loans. On the other hand, if you’re not looking to hold the property for long, a bridge loan could offer you the financial cushion you need while you find a buyer.