Owning a condominium can be a good investment. Aside from all the amenities it can offer, it also fosters a great sense of community. In the event that you decide to refinance it, condos can also provide you a sizeable amount of cash. Many owners opt to refinance their properties for a number of reasons. This may be to get a lower interest rate, change a loan term, consolidate debt or take out cash to cover home repairs and renovations.
In many ways, the condo refinancing process is similar to that of any other property. Your chosen lender will determine your individual qualifications for financing by looking into your income, assets, and credit. Your condo unit will also be appraised so your lender can assign a property value. Unlike with traditional single-family homes, however, refinancing a condo needs the approval of the condo project itself.
Since condo amenities include communal spaces and other services provided by the owner’s association, they have a huge impact on your property value. This is the reason why mortgage lenders and other investors take a good look at condo associations during the approval process.
Other considerations include the association reserve accounts and the percentage of owners occupying their units. If there is a shortage of reserve, it can be a hindrance to the borrower.
When Refinancing Your Condo Makes Sense
There are several advantages to refinancing your condo. One is that it can lower your monthly mortgage payment by reducing your interest rate. This happens when the rates are lower now compared to when you first got your loan. Look at the annual percentage rate (APR) and make sure it is less when you apply for refinancing. If your credit score has improved or you have less debt now than when you got your loan, you may also get a lower interest rate.
You can also get a shorter loan term when you refinance. This is a great option for borrowers who now earn bigger salaries than when they first took out a loan. While their monthly payment will increase, they can save thousands of dollars in interest by paying off their loans faster. Refinancing can also help get rid of mortgage insurance, especially if you have a federally-backed loan.
A federally-backed loan is designed for low to moderate-income borrowers, as it requires a lower minimum down payment and lower credit scores than other conventional loans. If you made a down payment of less than 10%, you also have to pay a mortgage insurance premium (MIP) throughout the duration of your loan. Most condo owners with federally-backed loans remove this insurance requirement by refinancing into a conventional loan once they reach 20% equity.
Another possible reason to refinance your condo is to take cash out by accessing your equity. Equity is the percentage of the property that you actually own. For instance, if you already paid half of what your home was originally valued, you now have 50% equity. When you decide to cash out, you are agreeing to accept a higher loan principal balance, then taking out the difference in cash. You can use the money to fund a college education or cover home repairs.
Some condo owners take cash-out refinances for debt consolidation. Debt consolidation is a form of debt refinancing where you combine several unsecured debts into one monthly bill. Learn more about this type of loan and how it works in London, Ontario. Since mortgage loan interest rates are typically lower than other types of loans, you can save a lot of money. You can then use that extra amount to pay off your other high-interest debts.
Difference between Traditional and Condo Refinancing
When you refinance, you get a new mortgage in order to pay off an existing mortgage. Refinancing a condo is the same as refinancing a home loan. Unlike a regular mortgage, however, you need to meet two sets of loan guidelines if you do decide to refinance your condo. The first is for you, whether your condo has been approved for conventional financing. The second applies to your condo owner’s association.
Approval is required from your association because essentially, it is an intermediary involved in refinancing your loan. This involvement adds an extra element of risk for your lender. The rules for your owner’s association can also create issues when refinancing your property. If your neighborhood includes multitudes of foreclosures and non-owner occupied units, or if your association’s financials are not okay, this may derail your plans for condo refinance.
In terms of documentation, you will need to provide your lender the following – pay stubs, wage and tax statements (W-2 form), bank statements, and tax returns. Your lender may also ask for special documents needed for your loan option. A VA home loan, for example, will require a Certificate of Eligibility (COE). Your condo owner’s association may also be asked for papers on bylaws and recorded declaration, among others.
Qualifications to Get Your Condo Refinanced
Just like with any mortgage lending, a creditor will look into several aspects in order to qualify a borrower for condo refinancing. These include looking into your income, assets, property, and credit. Income is a big factor in determining how much you can actually afford. One way to ascertain this is by calculating your debt-to-income ratio (DTI). DTI compares the amount of debt you have to your overall income.
Using your DTI, lenders will be able to determine your ability to pay your debt and make interest payments. You will want to keep your DTI at or below 36% to qualify for the most possible mortgage options. Aside from your income, creditors will also take a look at your assets. These include your savings and reserve funds. This is to ascertain if you will still be able to make payments in case you encounter incidents that will put a strain on your income.
Your credit is another important factor when you want to refinance your condo. Every lending option has a minimum credit score required to qualify. A poor credit score may end up ruining your refinancing plans. In Canada, you need a credit score of 680 or above to qualify for the best mortgage rates. While some lenders allow borrowers to qualify with credit scores between 600 and 680, they usually charge higher interests.