Let’s review what you need to know before making a decision on whether to refinance a rental property. Learn how refinancing a rental property mortgage can benefit you, and how it may be different from refinancing a mortgage on your primary home.
What To Know Before You Refinance
Refinancing is paying off your existing mortgage with a new mortgage, so you essentially have a new loan. Many homeowners refinance to take advantage of lower interest rates, which can save significantly on interest payments in the long term. You can refinance for rental properties just like you can refinance for your primary home, but there are some differences in the processes. For one, refinancing on investment properties may have stricter requirements for rental properties, such as stricter loan-to-value ratios. As with financing a mortgage, you’ll want to keep a stable income, avoid acquiring new debt, and maintain a good credit score. Rate and term refinances, also called no-cash-out refinances, allow you to adjust both the length and the interest rate of your mortgage without taking any money out from the property. Refinancing a rental property with a cash-out loan can give you money to use as a down payment on another rental property, to remodel your home, or fund your child’s college education. If you want to take out equity from your rental property with a larger loan, consider whether you can afford the new mortgage payment. The new payment will be based on the terms of your refinanced loan, which may drive up the cost significantly if you’re withdrawing a lot of equity. Refinancing a property is similar to the process of taking out a mortgage, and it can entail the same costs, such as closing costs. Be sure there’s enough equity in the property to make the process worth it.
How To Refinance Your Rental Property
Refinancing a rental property is similar to refinancing a mortgage on your primary home.
Find the Right Lender
You’ll need to find a bank that offers refinancing for rental properties. You may want to start off with your current lender. Some lenders are willing to offer discounts such as waived application fees and reimbursed appraisal costs if you refinance their loan with them.
Organize Documents
Gather important documents. These include pay stubs, bank statements, and tax returns. If you’re using the income from your rental property to qualify, you’ll also want to have that information on hand. Lenders may, for example, accept executed leases or tax returns as proof of income for your rental property.
Apply for the Loan
Like with a typical mortgage, when you apply for a refinance, your lender will ask for information about your specific financial situation, including information on your income, assets, credit score, debts, value of the property, and the amount you are requesting to borrow. Lenders will also require you have sufficient cash reserves on hand. The amount you’ll need will vary according to the number of units on the property and the number of properties you currently have financed, among other criteria.
Underwriting and Appraisal
Once a lender has your information, they’ll need time to determine whether you meet their criteria. They’ll consider factors such as your debt-to-income ratio and credit score, as well as whether you have sufficient equity in your property. You’ll be required to get an appraisal with a refinance. If your rental home is currently occupied, you may have to negotiate a time with the tenant for an appraiser to enter the home.
Closing
Finally, like with a first mortgage, you’ll close on a refinance loan by reviewing and signing documents, and paying any closing costs you owe. The closing process for a refinance can be faster than for a home purchase.
Refinancing a Rental Property vs. Owner Occupied
The process for refinancing a rental property is very similar to refinancing a mortgage for your primary residence, which, in turn, is similar to the process of getting a mortgage for a home you buy. However, there are some differences between refinancing for a rental compared to refinancing your main home. Lenders generally have stricter criteria for loans on your investment property, so you may, for example, have to prove a better loan-to-value ratio. Mortgages for rentals also tend to have higher interest rates.
