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Refinancing
Rental Property PART 1
Why and How to Refinance Rental Properties
If done the
right way at the right time, refinancing rental property can actually
be a clever way to avoid capital gains tax, cut down on your
mortgage rates or cash out on your rental property
equity. Find out when and how to refinance rental properties
today.
What
are the Different Ways for You to Refinance Rental Properties?
The basic
idea behind refinancing
rental
property is simple yet
powerful. What it means is that you simply replace the
current mortgage loan for your rental property with a new loan that
comes with different terms and conditions.
There are two major ways to refinance rental property -
Mortgage
Refinancing and Cash
Out Refinancing.
Mortgage
refinancing replaces your remaining debts with a new loan with lower
interest rates or better terms. Cash out financing involves
you
taking on a new loan which is larger than your remaining debts to free
up the equity on your rental property as extra cash.
For
example you took out a mortgage
loan of $200,000 at 8% interest rate to buy your rental property. Five
years later you have paid off $100,000 of your mortgage loan and the
market interest rate has fallen to 5%. To make things simple, let's
assume that the
value of your rental property remains the same at $200,000 after 5
years.
If
you go for a mortgage refinance, you are effectively replacing your
current mortgage with a new loan
of $100,000 at 5% interest rate.
If
you opt for cash out financing, you will get to pocket a tidy sum of
money in exchange for a larger mortgage debt. Returning to our example
above, let's say you decide to take out $50,000 in cash instead. In
this case the new mortgage loan will be higher at $150,000 (instead of
$100,000).
Refinancing
Rental Property to Avoid Paying Your Capital Gains Tax
Let's
say you bought a rental property for $250,000 and you paid a down
payment of $50,000. This means that you took out a mortgage loan of
$200,000. 3 years later the value of your rental property rises
to $300,000 and you still owe $150,000 in mortgage loans.
What can
you do to pocket this profit from the increase in your rental property
value?
The
first method is simple and direct. Simply look for a suitable buyer and
sell off your rental property for a tidy profit. However this means
that you will be slapped with a tax for your capital gains
on rental property and end up giving up a chunk of your
profits.
In this
case, cash out refinancing will be a smarter choice because
you will not only avoid paying a single cent on capital gains
taxes but also get to keep your rental property. The money that you
pocket from refinancing rental properties is completely tax-free as
well.
Returning to the example above, what will happen if you choose to
refinance rental properties instead? Let's say you manage to find a
mortgage lender who is willing to lend you 80% of the current property
value ($300,000) which means that the new loan for your rental property
will be $240,000.
After paying off the remainder of your old debt ($150,000), you will
end up with $90,000 of cash that you are free to re-invest or spend.
Do you know
that refinancing rental property is also a popular
way to slash your mortgage loans and other consumer debts such as
credit card bills and car loans?
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