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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
- How to refinance an investment property: Step-by-step
- What lenders are looking for when refinancing
- How to qualify for an investment property refinance
- How to compare investment and rental property mortgage rates
- Frequently asked questions about refinancing investment and rental properties
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.
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. 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. Learn More: Cash-Out Refinance on an Investment Property: How It Works 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. Find Out: How to Refinance Rental and 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. 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 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: 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). 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. 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. 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. 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. 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. 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. 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: 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: 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. 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: 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. 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. 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. 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. 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. 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.Change the type of loan you have
Cash in on your equity
Enable increase of rental income
Pay for additional investment properties
Cover other expenses
How to refinance an investment property: Step-by-step
Step 1: Shop for a lender
Step 2: Compile your financial documents
Step 3: Submit your application
Step 4: Lock your interest rate
Step 5: Work with your lender through underwriting
Step 6: Close on your loan
What lenders are looking for when refinancing
How to qualify for an investment property refinance
Credit score 640 to 720
Debt-to-income ratio 45% (including your new, expected mortgage payment)
Loan-to-value ratio 70% to 85%
Equity reserved 15% to 30%
Cash reserves 6 to 12 months
Property How to compare investment and rental property mortgage rates
Frequently asked questions about refinancing investment and rental properties
Why are interest rates higher on investment and rental properties?
What is a good investment property mortgage rate?
Should I refinance?
How often can I refinance?
Can I refinance with bad credit?
Compare your refinance options now