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When generating funds to run your business gets tough, you might start to wonder if you should refinance your mortgage to get the money you need. Many people do this, so it makes sense. However, it’s not always the right solution for everyone.
In the wake of the COVID-19 pandemic, many Americans are facing the tough decision to either close their business or continue financing it from other sources. Interest rates are the lowest they’ve been in years. Australians are in the same boat, loan providers are offering historically low interest rates. Refinancing when interest rates are low is a wise move, but is it the right move to fund your business?
If you’re tapped out of funding sources, and you need money to run your business, ask yourself the following four questions before refinancing your mortgage.
1. Is Refinancing Worth the Cost?
In terms of fees, refinancing your mortgage to fund your business will be just like taking out a new loan. You’ll pay the same loan fees, including:
- An application fee. Even when you’re refinancing with the same lender, you’ll probably need to pay an application fee. This fee is due whether or not your loan is approved.
- An appraisal fee. Before a lender will finance you, they’ll want an appraisal. Appraisals can cost anywhere between $300-$500 (or more), depending on the area and your property.
- Attorney fees. Depending on the state you live in, you might be required to hire an attorney to review and file your loan papers. If that applies to you, you’ll need to pay an attorney their usual rate, which can be quite high.
- Title search and insurance fees. Many lenders will want to perform another title search during the refinancing process.
- Closing costs. Lenders have different requirements for closing costs. However, generally speaking, you can expect to pay closing costs equal to around 3% of your total loan.
Crunch the numbers before making a decision on how to fund your business. Make sure refinancing isn’t just going to put you in a deeper financial hole. Granted, it will take time for your business to earn the profits to cover the cost of refinancing. But, make sure your business income will eventually cover the cost.
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2. Will the Money be Enough to Significantly Increase my ROI?
Refinancing your mortgage to fund your business will cost you money. So, make sure you plan to use that money in a way that supports increasing your ROI. If you just pour the money into your business without a strategy to increase ROI, it will be a waste of money.
If you can’t get your business going strong with the money you’ll get from refinancing your mortgage, it’s not worth pursuing. Unless, of course, you have other reasons to refinance. For instance, if you need to lower your monthly payments, then it won’t be a waste after all.
3. Will Refinancing Affect my Mortgage Insurance?
If you paid less than 20% down, you’re probably paying mortgage insurance. If you refinance, there’s a chance you might end up no longer needing to pay mortgage insurance.
Since the premiums are calculated based on home value and loan amount, rising home values could push you above the 20% equity requirement, thereby negating mortgage insurance requirements.
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4. Can I Prove my Self-Employment Income?
Even though you’ve already been approved for your current mortgage, you’ll need to go through the same approval process to refinance in order to fund your business. Lenders will want to know you can afford the monthly payments, so you’ll need to provide certain documents, ike your previous tax returns—to prove your income.
If you’re self-employed, before applying to refinance your mortgage, gather your last two tax returns, your Profit & Loss statement, and 1099 tax forms. If you’re applying for a loan through Fannie Mae and Freddie Mac, they’ve recently set new standards for self-employed borrowers. Both lenders now require an audited P&L statement or an unaudited P&L statement along with two months of business account statements.
Have them ready when you submit applications, and you’ll have a better chance at being approved.
If Refinancing is Worth the Time and Cost, Go for It
With interest rates so low, it makes sense to refinance your mortgage, especially if you’re struggling to make high monthly payments. However, if you’re going to use the money for your business, just make sure you use the money to support your business directly.
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