Foreign Real Estate Investors: Refinancing Could Unlock Cash Flow

Remember when you could find cash flow just about anywhere?

Historically low interest rates on mortgages were as low as 2% not-so long ago. Times have really changed quickly. In recent years, the tide has turned quickly in the opposite direction, reaching as high as 8%.

All of this has made cash flowing real estate harder to find than a needle in a haystack–at least, until now. With rumors of interest rate drops on the near horizon, refinancing into new mortgages might just be the solution that creates more cash flow.

Refinancing a mortgage 

When you get a mortgage on an investment property, you’re not necessarily stuck with it. Refinancing involves taking out a new mortgage to replace an existing one. This creates valuable opportunities for you and other foreign real estate investors. 

Many international investors choose to refinance to secure a lower interest rate, change the loan term, or to access equity. Ultimately, refinancing can be an effective way to optimize your investment portfolio and capitalize on growth opportunities when circumstances shift.

Types of refinancing

Did you know that there are two primary categories of refinancing, each with its own unique benefits and purposes? Let’s explore the difference between a rate-and-term refinance and cash-out refinance to help you make an informed decision about your loan.

Rate-and-Term Refinance

As the name suggests, a rate-and-term refinance is all about improving the terms of your mortgage. This type of refinance focuses on making the details of your mortgage work in your favor in one way or another. Here’s a closer look at its key features:

• Interest rate. Typically you want to refinance into a lower rate than your existing mortgage. This helps you save on monthly payments.
  
  
• Duration adjustment. Another benefit could be to stretch out your duration for a longer term to reset the clock or to shorten it, allowing you to pay off the mortgage faster.
  
  
• Term modifications. Sometimes investors purchase property using an adjustable rate mortgage (ARM) because they can have lower rates than fixed mortgages– the catch is that an ARM adjusts its interest rate after a certain period of time. Investors looking to avoid that adjustment or to lock in a fixed rate will often refinance when overall interest rates drop.

Cash-Out Refinance

In contrast, cash-out refinance is about leveraging the equity you’ve built in your property. This option allows you to borrow more than your existing mortgage balance, providing you with cash that can be used for various purposes. Here’s what you need to know:

• Equity. It requires sufficient equity in your property to qualify– sometimes 70% or 75% loan-to-value (LTV) ratio depending on the lender. As such, the new loan exceeds your current mortgage balance, with the difference provided as cash.
  
  
• Leverage and reposition funds. Using a cash-out refinance, you can pull money out of your rental property for a variety of purposes. Some investors do this to scale, others to make improvements to that same property.
  
  
• Interest rate. These generally come with slightly higher rates due to the increased loan amount and associated risks. However, some investors are able to time this alongside interest rate drops to get the best of both worlds.

How higher interest rates impact cash flow

The truth of the matter is that no matter where you invest across the United States, cash flowing real estate has become increasingly harder to come by. Unless you have some secret recipe (please share if you do), the same rental properties that would be profitable at 2% simply no longer work financially at 8%.

To make the numbers work, foreign investors purchasing real estate have been left choosing between a few unimpressive options:

• Pay all cash. About half of all foreign investors opt to take this path. Without a mortgage on the property, investors can put most of their rental income back in their pockets. The downside is that by investing more in a given property, it limits the amount of capital available to make other investments.
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• High down payments. Many traditional investment property loans require a minimum of 25% down on the purchase price. Those who go above that threshold face many of the same pros and cons as cash investors.
  
  
• Taking a loss. Some investors have elected to put the minimum amount as a downpayment and accept negative cash flow while they wait (or hope) for rates to drop so that they can refinance.

How refinancing at lower interest rates make cash flow possible

The good news? The Federal Reserve is planning to cut interest rates. A quarter-point rate cut was announced shortly after the results of the United States presidential election were announced with Donald Trump returning to office. Some experts suggest that this will be reflected in the housing market in the first quarter of 2025, however no one knows for sure.

The better news? If predictions are right, investors with higher interest rates can refinance their existing loans into new loans at lower rates. Here are a few reasons this will increase cash flow:

• Lowering monthly payments. Securing a lower interest rate reduces the overall cost of the loan, putting more in your pocket.
  
  
• Access to equity. As mentioned before, cash-out refinancing allows investors who made large down payments, paid cash, or built significant equity to take advantage. 

Ready to refinance? Get a new loan in as little as two weeks¹

If this sounds good to you, Waltz has your back. We simplify the refinance process for foreign nationals investing in U.S. real estate. Getting a DSCR loan could take months, we can make it happen in just a few weeks. 

Reach out to learn more.

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