Foreign Nationals

How to refinance your U.S property as a Canadian investor

By Milo

March 1, 2024 8 min read

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How to refinance your U.S property as a Canadian investor

In 2024, Canadian investors are turning their sights towards refinancing U.S. properties, spurred by the intersection of evolving mortgage rates and the potential to unlock equity gains. This trend is driven by two main factors: the impending reset of adjustable-rate mortgages (ARMs) historically favored by foreign investors for their initial lower rates, and the significant appreciation of properties purchased pre-2021, offering a wealth of untapped equity. As ARMs approach their adjustment period in a landscape marked by rising interest rates, Canadian real estate investors are prompted to refinance to secure more favorable terms and avoid potential rate spikes. Additionally, cash-out refinancing has emerged as a savvy strategy for accessing the increased equity in these properties affordably, providing a capital boost for further investments or financial flexibility. This article aims to guide Canadian investors through the refinancing process in the U.S., particularly using Milo’s online portal tailored for international clients, to navigate these opportunities with ease and confidence.

Refinancing explained

Traditional Refinance: This option is akin to restarting your mortgage journey with potentially more favorable terms. Investors opt for traditional refinancing to secure lower interest rates, alter the loan's term length, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. The primary goal here is to reduce monthly payments, save on interest over the life of the loan, or both. In this scenario, you simply replace your existing mortgage with a new one under different terms, without changing the original loan amount. It's an effective strategy for those looking to capitalize on lower interest rates or adjust their loan structure to reflect changes in their financial landscape or investment plans.

Cash-Out Refinance: Cash-out refinancing goes a step further by allowing investors to take advantage of the equity they've built in their property. In addition to reworking the terms of your mortgage, you can also withdraw a portion of your home's equity as cash. This means you'll end up with a new mortgage amount that's larger than your previous one, reflecting the equity you've "cashed out" in addition to the remaining balance of your original loan. This option is particularly attractive for investors looking to reinvest in the market, make improvements to their current property, or diversify their investment portfolio. However, it's crucial to consider that this increases your loan amount and, potentially, your monthly payments, depending on the terms of your new mortgage.

Selecting the right refinancing option hinges on your financial aims, equity, and future plans. Traditional refinancing suits those improving loan terms, whereas cash-out refinancing suits those accessing equity for investment. This knowledge enables Canadian investors to make strategic U.S. real estate decisions.

Why are investors refinancing in 2024?

Refinancing a mortgage is a strategic decision influenced by several key factors that can enhance the financial health and growth prospects of an investor's portfolio. Here are the core reasons driving this choice:

Interest Rate Reduction: Securing a lower interest rate is a primary motivator. A lower rate can dramatically decrease the amount paid in interest over the life of the loan, translating into significant monthly and long-term savings.

Loan Term Optimization: Refinancing allows investors to adjust their mortgage's term. Shortening the loan term can lead to quicker equity building and less interest paid over time, while extending it can reduce monthly payments, improving cash flow.

Loan Type Conversion: Investors might refinance to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for more predictable, stable monthly payments, particularly beneficial in a rising interest rate environment.

Equity Access: A cash-out refinance enables investors to tap into the equity built up in their property, providing funds for additional investments, property improvements, or to diversify investment strategies.

The benefits of refinancing

Financial Savings and Efficiency: One of the most tangible benefits is the potential for immediate and long-term financial savings. For example, reducing the interest rate on a $500,000 loan from 7% to 6.5% can lower monthly payments and result in tens of thousands of dollars saved over the life of the loan.

  • Enhanced Cash Flow: Lower monthly payments through refinancing improve cash flow, freeing up capital that can be redirected towards new investments, bolstering other areas of the investor's portfolio, or enhancing liquidity.

  • Strategic Equity Utilization: By accessing the equity in their property through a cash-out refinance, investors can reinvest in the market, undertake property upgrades, or explore other avenues for growth, effectively leveraging one asset to enhance others.

  • Portfolio Diversification: The funds obtained from a cash-out refinance can also be used to diversify investment holdings, reducing risk and potentially increasing returns across the investor's portfolio.

  • Debt Consolidation: Refinancing offers an opportunity to consolidate higher-interest debt into a single, lower-interest loan, streamlining finances and reducing overall monthly debt payments.

Example

Let's consider an adjustable-rate mortgage (ARM) scenario to illustrate how refinancing could benefit an investor, especially with an original interest rate at 7%. This example will show the potential financial impact when an investor with an ARM faces rising interest rates and decides to refinance to a more stable, fixed-rate mortgage in 2024.

Original Adjustable-Rate Mortgage Conditions:

  • Original Loan Amount: $500,000
  • Original Interest Rate: 7% (ARM, which could increase due to rate adjustments)
  • Loan Term: 30 years
  • Initial Monthly Payment: Approximately calculated for the first period before rate adjustments

Scenario: Assuming the ARM is set to adjust and the investor is anticipating an increase due to the current high-interest rate environment in 2024. The investor decides to refinance to a fixed-rate mortgage to avoid further rate increases and gain payment stability.

Refinancing to a Fixed-Rate Mortgage:

  • New Interest Rate: 6.5% (Fixed)
  • Loan Term: 30 years

Given the potential for the ARM to adjust upwards beyond 7% due to market conditions, locking in a 6.5% fixed rate could provide significant savings and financial predictability.

Calculating the Monthly Payment: Let's calculate the initial monthly payment at 7% and compare it to a fixed-rate refinance at 6.5% for a $500,000 loan over 30 years to illustrate the change more concretely.

Let's calculate: For the original adjustable-rate mortgage (ARM) at a 7% interest rate, the initial monthly payment for the $500,000 loan over 30 years is approximately $3,326.51. After refinancing to a fixed-rate mortgage at 6.5%, the new monthly payment is about $3,160.34. This refinancing scenario provides the investor with a monthly savings of approximately $166.17.

Key Takeaways

  • Financial Stability: Refinancing from an ARM to a fixed-rate mortgage at 6.5% secures a predictable monthly payment, protecting the investor from potential rate increases that could have escalated the monthly payments even further had the ARM adjusted upwards in the future.

  • Cost Savings: While the immediate monthly savings of $166.17 might seem modest, it adds up over time, providing a buffer that can be redirected towards other investments, expenses, or savings, enhancing the investor's financial flexibility.

  • Investment Strategy: This move not only safeguards against unpredictable interest rate hikes but also aligns with a cautious and strategic approach to long-term investment planning, ensuring that the investor's cash flow remains stable and predictable, which is invaluable for maintaining and growing a real estate portfolio in a volatile economic environment.

This example illustrates the prudent financial decision-making that refinancing can facilitate for Canadian investors in the U.S. real estate market, especially in a landscape characterized by higher interest rates.

Step-by-step guide to Milo’s refinance mortgage application

Overview of the U.S mortgage application process - Milo - getting started.png

Navigating the U.S. mortgage landscape as a Canadian investor has been markedly simplified by Milo’s online application, which is tailored to meet the unique needs of international clientele. Milo’s online portal breaks down the refinancing process into manageable steps from initial inquiry to closing. Here’s a closer look at each stage within Milo’s system and the critical importance of the information requested during the application process.

1. Account Creation: The journey begins with creating an account on Milo’s platform. This step is fundamental as it involves submitting basic demographic and contact information. This information is crucial for Milo to provide timely updates and support throughout the application process. For those who have previously engaged with Milo, perhaps for a prequalification letter, this account will already be in place, streamlining the process further.

Overview of the U.S mortgage application process - Milo - 1.png

2. Getting an Offer: Within minutes, Milo can provide an initial loan offer based on preliminary information provided by the applicant. This swift feedback gives a glimpse into the possible loan terms, setting the stage for more detailed discussions.

3. Complete Application: This stage requires a deeper dive into the applicant's financial status and the property in question. Detailed information is necessary to refine the loan offer, ensuring it aligns with both the applicant's needs and the property's value.

4. Secure Your Offer: Commitment to the process is solidified by paying for the property appraisal. This critical step verifies the property's market value, which is essential for finalizing the loan amount.

5. Validate Your Information: Verification of documents and information provided during the application ensures accuracy and integrity. This validation process is key to moving forward with confidence on both sides.

6. Schedule Closing: The final step in the application process is scheduling the closing date. This stage culminates in the finalization of the mortgage, marking the beginning of the new loan terms.

Importance of application questions

Milo’s platform is meticulously designed to gather comprehensive data that's pivotal for tailoring loan options to the investor's specific circumstances. Here’s why each question matters:

  • Property Address: Determines the loan terms by assessing the market conditions and property values in the specific location.
  • Property Type and Home Type: Influences eligibility and loan terms, reflecting the investment's risk and potential return.
  • Estimated Value and Mortgage Balance: Essential for understanding the equity available and determining the maximum loan amount.
  • Rental Income and HOA Fees: Offers insight into the property’s cash flow and ongoing costs, crucial for assessing loan affordability.
  • Ownership and Property Count: Reveals the investor’s experience and financial stability, impacting lender confidence.
  • Income Source and Repayment Plan: Critical for evaluating the borrower's ability to meet loan obligations and their long-term financial strategy.
  • Passport + Immigration Status: Ensures legal entry into the U.S., a basic requirement for loan approval.
  • FICO Score and Financial Details: While not mandatory, a good credit history can improve loan terms. Details like annual income and liquid assets are vital for assessing financial health and loan suitability.

Milo's online portal simplifies the U.S. mortgage refinancing process for Canadian investors, providing a clear, step-by-step guide from application to closing. By focusing on the essential details and understanding the significance of each step, investors are equipped to navigate the complexities of refinancing with confidence. Whether aiming to leverage property equity, secure better loan terms, or strategize investments, Milo offers a tailored solution, ensuring a seamless and efficient refinancing experience for Canadians in the U.S. real estate market.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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