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Refinancing can be a smart move for any property owner, but for rental property investors, it can be particularly helpful.
With a mortgage refinance, you can reduce your interest rate, shorten your loan term, take cash out of the home, or even finance new investments. And when done right, it can ultimately mean lower costs and higher profits.
If you’re considering refinancing a rental property, here’s what you need to know:
How to refinance a rental property
Refinancing a rental property loan isn’t difficult, but you will want to be prepared. That means having a good grasp on your finances and credit, getting your financial documentation in order, and doing your due diligence when finding a lender.
Here’s the step-by-step process you should follow for a mortgage refinance:
Step 1: Know your financial situation
Lenders generally have stricter qualifying standards for investment property owners due to the higher risk of foreclosure they present. Think of it this way: If someone falls behind on their mortgage, which property are they more likely to walk away from — the home they live in or an investment property? In most cases, it’d be the latter.
Below are the general minimum requirements, though these will vary by specific lender, loan program, and other factors like how many units your rental property has.
|Max LTV||70% to 75%|
|Min. credit score||660|
|Cash reserves||6 to 12 months|
Step 2: Get your documents in order
When applying to refinance your rental property, you’ll need a number of financial documents — just as you did when you first got the loan.
Learn More: How to Refinance Your Mortgage
Step 3: Compare lenders and rates
The next step is to determine which lender you’ll use. Since mortgage lenders vary on interest rates, terms, and qualifying requirements, you’ll want to shop around and compare quotes from at least a few. Getting multiple quotes can save you money.
If you’re looking for a quick and easy way to compare mortgage refinance rates, Credible can help. By filling out just one form, you’ll be able to compare prequalified rates from our partner lenders in the table below in just minutes.
Step 4: Apply for a mortgage refinance
Once you’ve determined who the best fit is, you’ll need to fill out the lender’s full application. Having your documents on hand here can help, as the application will require detailed info about your income, debts, and finances. The lender will also pull your credit.
Generally, filling out the full application can take up to an hour, so make sure you clear some time in your schedule. You may also want your spouse or co-buyer nearby to answer any questions about their income or employment.
Step 5: Lock in your mortgage rate
After you’ve applied for your loan, you’ll want to consider locking your mortgage rate, which guarantees you your quoted rate for a set period of time — usually between 30 and 60 days. Since mortgage rates fluctuate daily, this can be a good way to protect yourself from rate increases in the time it takes to process your loan.
Step 6: The lender underwrites your loan
During the underwriting phase, your lender is looking to verify your financial information, ensure you meet the loan’s requirements, and confirm that you can comfortably afford the new mortgage payment you’ll be taking on. It’s in this step that you will need to provide the documents you gathered in Step 2 to your loan officer.
Step 7: Close
The final step is to close on your loan. Attend your assigned closing appointment, sign your papers, and pay your closing costs. On a refinance, closing costs generally average around $5,000. Once you’re done, you technically have three days to change your mind. Otherwise, your refinance will be processed, and you’ll be done.
Why you should refinance your investment property
It sounds like a lengthy process, but refinancing your mortgage is often worth the work. Here are just a few of the reasons to refinance your rental property loan:
Reduce your interest rate
If your credit has improved or market rates are below your current loan’s interest rate, you might qualify for a lower-rate loan. This would mean a smaller monthly payment and fewer interest costs in the long run.
Keep Reading: How to Refinance an Investment Property
Change your loan term
You can also refinance into a shorter-term loan (say, from a 30-year mortgage to a 15-year one) to pay off the loan faster. Similarly, you can refinance into a longer-term loan to lower your monthly payments.
In some cases, you might also consider refinancing to an adjustable-rate loan. This could lower your payment as well.
Take cash out of the home
A cash-out refinance lets you take money out of your home equity. You can then use the cash to improve your property, make repairs, or even finance a new investment. It’s a good alternative to a home equity line of credit.
Increase your rental property income
There are several ways a refinance can improve your profits as an investor. First, it can give you a lower rate and monthly payment, thereby increasing your monthly proceeds. A refinance can also give you cash to improve your property, which might allow you to increase your rent.
Keep in mind there is a cost to refinance, so it may be a bit before you recoup and come out on top financially.
Find Out: How Often Can You Refinance Your Home?