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If your investment property is mortgaged, then it might be time to consider a refinance. Refinancing can lower your interest rate, reduce your monthly costs, and boost your bottom line as an investor. However, rates can also be higher, so you’ll want to compare your options before moving forward.
Here’s what you need to know about refinancing investment property:
Advantages to refinancing an investment property
These are some of the most common reasons you may want to refinance your mortgage, and why they might benefit your situation.
Lower your interest rate
If market rates are lower than the initial rate you qualified for on your loan, then refinancing can help you lower your interest rate. That means a lower monthly payment, a bigger margin between your tenant’s rent and your mortgage, and more cash flow.
Lower your monthly payment
Refinancing to a longer-term mortgage can be another way to lower your monthly payment. If you only have 15 years left on your loan, for example, and then you refinance into a new 30-year loan, your balance is then spread out over many more years and months, thus lowering your payment. Keep in mind though that a longer term means you may pay more interest over the life of the loan.
Pay off your mortgage faster
You can also refinance into a shorter loan term, which would allow you to pay off your mortgage sooner and with less interest paid over time.
Head’s up: Shortening your loan term will mean a higher monthly payment.
Change the type of loan you have
In some cases, you might want to refinance to change your loan type. For example, if you have an adjustable-rate mortgage, you may want to refinance into a fixed-rate loan to keep your rate from fluctuating. Alternatively, you can also refinance to an ARM mortgage from a fixed-rate loan to save on monthly costs. ARM rates are generally lower at the beginning of the loan.
Cash in on your equity
If you’ve built up a good amount of equity in your home, then you might qualify for a cash-out refinance. This lets you take out a loan larger than your current balance, and then keep the difference in cash. You can use those funds in many ways — like for your business or otherwise.
Enable increase of rental income
If your refinance lets you lower your monthly payment or cash in on your equity, you can then use that freed-up cash to make the kind of investments that increase the income your property creates. You can update the property, repair items that need to be fixed, or add amenities that will justify a higher rent.
Pay for additional investment properties
You can also use the additional cash your refinance creates to fund additional investment properties. Use your cash-out refinance funds as a down payment on a new property or to cover closing costs on your next loan. You could even use them to pay for rehab costs on a fix-and-flip investment.
Cover other expenses
The money you free up through refinancing can also go toward other expenses — personal ones like vacations, college tuition, medical bills, or your retirement efforts. You could also use it to pay off credit cards or other debts.
Read More: Cash-Out Refinancing vs. Home Equity Loan
How to refinance an investment property: Step-by-step
Refinancing an investment property works much like applying for your initial mortgage loan. You’ll need to shop for a lender, fill out an application, go through underwriting, and close on the loan.
Here’s how to refinance your investment property, step by step:
- Shop for a lender
- Compile your financial documents
- Submit your application
- Lock your interest rate
- Work with your lender through underwriting
- Close on your loan
Step 1: Shop for a lender
Every lender has different mortgage refinance rates and fees, so it’s important to compare several options before deciding who to go with (Credible can help here).
Remember: You don’t need to use the same lender you did for the original loan.
Step 2: Compile your financial documents
You’ll need a good amount of documentation to refinance your investment property. Essentially, you’ll need anything that pertains to your income, assets, and personal wealth.
Here’s a sample list, though the exact requirements will depend on your lender:
- Your last two personal tax returns
- Your last two business tax returns
- Two recent pay stubs
- Any W-2s or 1099s
- Proof of any additional income (disability, Social Security, pension, etc.)
- Proof of your rental property income
- The last two months of bank statements
- The last two months of any asset accounts (IRAs, 401Ks, stocks, bonds, etc.)
- Proof of your homeowner’s insurance
Step 3: Submit your application
You’ll need the above documents as you fill out your chosen lender’s application. They’ll use it to evaluate your risk as a borrower, determine if you qualify for the loan, and set your interest rate. They’ll also pull your credit report once you’ve submitted the application.
Step 4: Lock your interest rate
Once your application is processed, you’ll want to lock your interest rate to ensure it can’t rise before you close on the loan. Lenders’ lock periods vary, but they usually safeguard you for around 30 to 60 days. You may have to pay a fee if you want a longer lock period.
Step 5: Work with your lender through underwriting
As your lender works to underwrite your loan, they might request other pieces of information or documents along the way. It’s important you respond to these quickly and produce any documentation needed ASAP. The longer you take to respond, the more it could delay your loan closing.
Step 6: Close on your loan
Finally, your lender will assign you a closing date. This is when you’ll sign your documents, pay any closing costs, and finalize the loan. In many cases, refinances can be done at your property, with just a notary at the kitchen table.
Keep in mind: You have three days to change your mind on the refinance (called the right of rescission). If you don’t use this right, your loan will fund after that three-day period, and your refinance will be complete.
What lenders are looking for when refinancing
Lenders tend to be more strict when it comes to financing investment properties and second mortgages. That’s because the risk of default is higher. Typically, a property owner is more likely to stick it out with their personal home than an investment property in hard times.
Because of this, lenders require you to have a good credit score, a low and stable debt-to-income ratio, a bigger down payment (or more equity in the home), and more in cash reserves to qualify for an investment property refinance.
How to qualify for an investment property refinance
You and your property will need to meet certain requirements to qualify for a refinance. These requirements will vary by lender and loan program, but the below chart offers a good high-level look at what sort of standards you can expect to be held to:
||640 to 720
||45% (including your new, expected mortgage payment)
||70% to 85%
||15% to 30%
||6 to 12 months
- Up to 4 units
- May need multiple appraisals
- Must be safe and meet minimum property standards before funding (if you’re using an FHA loan)
How to compare investment and rental property mortgage rates
Rates and fees tend to be higher on investment property loans than traditional mortgages, so it’s especially important that you shop around and compare your options. You’ll want to consider at least a handful of mortgage lenders, making sure to compare interest rates, APRs, closing costs, and other fees when you do.
When comparing your options, you’ll want to look at these line items:
- Interest rates: A lower interest rate will typically mean a lower monthly payment, but make sure you’re comparing apples to apples. You can’t compare one lender’s 30-year fixed refinance rates to another’s 15-year fixed refinance rates. Make sure you’re looking at the same numbers.
- APR: APR is the annual cost to borrow the money, including the interest rate and any fees. It’s a good barometer for comparing lenders — especially ones who are really close on interest rates.
- Rate locks: Refinances have been taking a little longer to process these days due to the high demand, so if one lender gives you a longer rate lock (and their rates and fees are comparable), they might be the better option.
- Closing costs: The fees you’ll be charged at closing will be wildly different from one lender to the next. Take a look at the total cash you’ll need to bring to closing on each, and see which is lowest. You should also check if any of the lenders have rolled the closing costs into the loan on their estimates. While this lowers your upfront costs, it also means a higher loan balance, a bigger monthly payment, and more interest paid in the long run.
Credible can help make comparing your options easier. With just one form, you can receive detailed loan estimates for several lenders at once. You can also get pre-approved from each lender, allowing you to move forward quickly once you’ve made your decision.
Frequently asked questions about refinancing investment and rental properties
Refinancing your investment property loan can be a complicated process, and you might have some questions along the way. Here are a few of the most common:
Why are interest rates higher on investment and rental properties?
The main reason is that investment properties are riskier for lenders.
Not only are you more likely to default on the loan than someone who lives there, but your income also relies on the property. So, if the market turns sour, the home loses value and your income takes a hit — both of which are risky for the lender.
What is a good investment property mortgage rate?
This depends on the market, your location, and your current rate.
Generally, if you can reduce your rate and you know you’ll own the home long enough to reach the break-even point — or the point at which your refinance saves you more than it cost to execute — then it’s a smart move to refinance.
Should I refinance?
To determine this, you need to know your goals for refinancing. If it’s to save money and you will reach the break-even point, then it may be worth it. If you’re refinancing to get funds to pay off medical bills or the down payment on another property, then the answer depends on how much equity you have.
How often can I refinance?
Typically, there’s no limit to how often you can refinance your mortgage, though some lenders and loans may require some “seasoning” of the loan before you’re eligible. This is essentially just proof you can make your payments for a few months. For example, FHA loans require six months of payments before you can refinance your mortgage.
Can I refinance with bad credit?
There aren’t many home refinancing options for investors with bad credit. Some lenders will allow you to refinance an investment property loan with a score as low as 640. If it’s below this threshold, you may want to spend some time improving your score before applying. Not only will it help you qualify, but it could improve the interest rates you’re given when you do.
Compare your refinance options now
Are you ready to see what rates and loan terms you qualify for on your investment property refinance? Credible can help. You can compare multiple lenders and see prequalified rates in as little as three minutes.
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- Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
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