Refinance BasicsQuestion 5
What Are the Risks of Refinancing a Rental Property?
Risks include closing costs that may not be recouped, resetting your amortization schedule, higher total interest over time, and potential appraisal shortfall.
While refinancing often makes sense, it's not always the right move. Consider these risks before proceeding.
- Closing costs: 2%–5% of the loan amount. If you sell or refinance again before the break-even point, you lose money.
- Amortization reset: Refinancing into a new 30-year loan restarts your amortization clock, meaning more interest paid over the life of the loan.
- Higher total interest: Even at a lower rate, extending your loan term can result in more total interest paid.
- Appraisal risk: If your Houston property appraises lower than expected, you may not qualify for the terms you want.
- Over-leveraging: Cash-out refinancing increases your debt. If rents drop or vacancy rises, higher payments can strain cash flow.
Bottom Line
Always calculate the break-even point before refinancing. If you won't hold the Houston property long enough to recoup closing costs, the refinance may not be worth it.