How To Refinance An Investment Property

Did you know that on top of refinancing the mortgage on your primary residence, you can also refinance your investment property?

An investment property refinance can make your loan more manageable, give you the cash you need to improve your tenant’s space or reinvest for any other purpose you might need.

Refinance An Investment Property: 6 Advantages

Here are some of the reasons why you might consider refinancing your investment property.

1. Lower The Refinance Rate For Your Investment Property

Typically, the interest rate for an investment property runs at least 0.5% – 0.75% higher than what the same borrower might pay for a mortgage on their primary residence.

That’s because investment properties represent a larger risk for lenders. Mortgage lenders know that if you run into financial hardship and can only afford a single mortgage payment, you’ll almost always choose your personal home.

To account for this risk, lenders charge more interest on investment properties – though your rate will also depend on your current credit score. Since two mortgage payments can be unsustainable, you might want to search for a lower rate by refinancing.

Refinancing can give you access to lower rates if:

• You can successfully manage the cash flow on your rental property
• You have enough income to offset both payments

Compare your current refinance interest rate with offers from different lenders before you refinance.

2. Change The Mortgage Term

If you shorten your investment property’s loan terms, you will pay more each month, but own the property free and clear sooner. You’ll also pay less interest over time, making it cheaper in the end.

Or, if you have trouble making your current monthly payments, you could lengthen your loan term. You’ll pay less each month, but mortgage payments will be spread out over time and accrue more interest. Keep in mind, refinancing by changing the length of your mortgage may or may not change your interest rate.

You may also be able to refinance from an adjustable-rate mortgage to a fixed-rate mortgage. Investment property owners often choose to switch to a fixed interest rate because their rates don’t change on a month-to-month basis, which gives you a more consistent set of monthly expenses.

3. Tap Into Your Home Equity

As you make monthly payments and pay off your principal, you increase your home equity. Home equity is the dollar amount of ownership you have in a property. Your home equity includes any money you put down on the home, plus any principal you’ve paid off. However, paying off interest doesn’t build equity.

Let’s say you took out a mortgage for $200,000 with a 20% down payment of $40,000. Over the years, you paid another $40,000 down on your principal and have $120,000 left on your loan. In this example, you have approximately $80,000 worth of equity in your home that you can tap into with a home refinance.

By borrowing against the equity in your home, you can access the cash through a home equity loan or cash-out refinance and use the money to fund repairs, pay off credit card debt or pay for almost anything else.

4. Increase Your Rental Income

Are you getting the most rent possible out of your investment property? If you refinance to make a few improvements or repairs to your investment property, you can possibly rent the property out for more money in the future. Common upgrades you can make to increase your cash flow include:

• Adding an addition to the home to increase the living space
• Finishing a basement and renting it out as a separate apartment
• Repairing the roof and replacing missing tiles
• Upgrading major appliances, cabinets and floors
• Repainting the interior rooms to enhance the property’s appeal
• Finishing or maintaining an outdoor structure like a pool or fence
• Upgrading the furnace or central cooling system

Improving the livability of your space builds goodwill with your current tenants and increases the market value of your home. This means that you can charge more in rent in the short term and make your money back by selling the property for more money later.

5. Finance Other Real Estate Investments

You may want to use your home equity to finance a down payment on a real estate investment that you want to buy quickly. As your home equity has grown over time, you have more potential money to use in a refinance to buy another investment property.

By using your equity to put down money on another property, you can potentially generate even more profit, or invest in a new type of real estate venture, like a commercial property.

6. Fund Almost Anything Else

Unlike other types of loans, there are no limitations on what you can do with the money you receive from a refinance. Refinancing can give you access to an easy source of cash – and you can use it for almost anything you need. Here are just a few examples of what you can do with your cash from refinancing:

• Grow your child’s college tuition fund
• Boost your retirement savings or invest in the stock market
• Consolidate credit card debt at a lower interest rate
• Use the funds for medical debt
• Continue your education by enrolling in college or university courses
• Fund repairs or upgrades on your primary residence
• Take a dream vacation
• Pay for a wedding

Think a refinance might be for you? Use our refinance calculator to see if refinancing your rental property can help you achieve your goals.

How To Refinance A Rental Property Or An Investment Property

Now that we’ve gone over the benefits of refinancing, it’s time to take a look at how you can refinance your own investment property. Fortunately, refinancing a rental property is usually less complicated than buying a home.

Step 1: Build Equity

Before you can refinance your investment property, you’ll need to build some equity. Lenders have different requirements for how much equity you must have in your property before you can refinance. As a general rule, most lenders want to see a loan-to-value ratio (LTV) that’s lower than 75%, meaning you’d need to have at least 25% equity in your property.

Step 2: Gather The Proper Documents

Your lender will ask you for several documents to begin the refinancing process. These include:

• Proof of income: This includes your original pay stubs from the last 30 days, a bank statement or another form of income verification if you’re self-employed.
• Copies of your W-2 or 1099 forms: These forms are used to verify your employment history and If you’re self-employed, you may be asked to show your full tax return.
• Proof of homeowners insurance: This shows the lender that you have enough homeowners insurance coverage on the property to protect your investment.
• Copy of your title insurance: Your title insurance helps your lender verify that the property is yours to refinance, along with providing a legal description of the home and basic tax information.
• Copies of your asset information: Your lender will want to see your assets, including bank statements, investment account information and retirement savings.

Gather the proper documentation before you apply for refinancing to help speed up the refinance process and keep multiple copies available in case you need to resend any documents.

Step 3: Compare Refinance Rates And Apply

Don’t be afraid to shop around and compare rates from different lenders to ensure you’re getting the best deal on your investment property refinance. It’s not uncommon to find a better deal with a new lender, but your relationship with your current lender could also work to your advantage if you’re in good standing.

Once you’ve settled on a lender, contact them to begin the application process. Complete the lender’s application, submit the requested documents and respond to any inquiries quickly.

Step 4: Lock Your New, Refinanced Rate

Once your lender approves your application, you’ll usually have the option to lock your interest rate. This gives you time to read your refinancing terms without worrying about your interest rate changing.

Rate locks may last 15 – 60 days, depending on your lender. Your location and loan type may also play a role in how long your rate lock lasts.

If you’re happy with the proposed rate, lock it in through your lender as soon as possible. If not, you can “float” your rate and proceed with the loan. If you float, keep in mind that your rate may either go up or down, depending on how market rates change.

Step 5: Go Through Underwriting

Your lender will proceed with the underwriting process after you lock your rate. During underwriting, your lender will likely request your most recent tax returns to verify your income and assets as well as the condition of the property. Similar to when you bought the home, the lender also orders an appraisal.

An appraisal determines the fair market value of a home. Appraisals are also often used to estimate property taxes. Make sure your home is looking its best before your appraiser arrives. You may also want to put together a list of upgrades you’ve made to the home since you bought the property.

If the property currently has a tenant, you will want to coordinate with them for the appraiser to access the property.

Step 6: Close On The Loan

After underwriting concludes, it’s time to close on your new loan. Closings for refinances happen more quickly than home purchases. At least 3 business days before your closing meeting, your lender gives you a document called a Closing Disclosure.

Your Closing Disclosure covers the details of your new loan, as well as any closing costs or fees you need to pay. At your closing, you’ll sign all of your documents and ask any last questions you have about your loan.

If your lender owes you money, such as during a cash-out refinance, you’ll see it in your bank account within the next few days.

The Bottom Line

Refinancing an investment property is similar to refinancing a mortgage on your primary residence. This might be a good option to secure a lower interest rate or change your loan terms. Plus, using a cash-out refinance or home equity loan could allow you to take money out of your accumulated home equity.

Fortunately, the refinancing process is usually simpler than applying for a standard mortgage, so you won’t have to go through as thorough of a process as when you first purchased your investment property.

If you’re ready to refinance your investment property, start the mortgage refinance process with Rocket Mortgage^®!